Appendix — Oswald v. General Motors Corp.

In THE

Supreme Court of the Anited States

Octoser Term, 1978

BETTY OSWALD, on her own behalf and behalf of

others similarly situated, and PHIL MILLER and

KILEEN MILLER, on their behalf and on behalf of

others similarly situated and SKOKIE CENTRAL

TRADITIONAL CHURCH, Petitioners,

vs.

GENERAL MOTORS CORPORATION, Respondents,

APPENDIX TO

PETITION FOR WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE SEVENTH CIRCUIT

CHARLES A. BOYLE

77 West Washington Street

Chicago, Illinois 60602

(312) 368-1060

Plaintiffs’ Liaison Counsel and

Counsel for Plaintiff s-Objectors

Of Counsel:

LAWRENCE A. WALNER

Francis EK. GoopMan

ABRAHAM N. GOLDMAN

MicwareL D. BucHwacH

Wituram J. Harte

Midwest Law Printing Co., Chicago 60601, Financial 6-3988

\

| worm Ronan, IR., CLERN

INDEX TO APPENDIX

. The Order of May 4, 1979, of the U.S. Court of

Appeals for the Seventh Circuit, denying plain-

tiff-objectors motion to stay issuance of the man-

date

- The Opinion and Order of February 29, 1979, of

the U.S. Court of Appeals for the Seventh Circuit,

reversing and remanding with instructions to the

US. District Court for the Northern District of

Dlinois

. Findings of Fact and Conclusions of Law, togeth-

er with the Order of July 17, 1978, of the U.S. Dis-

trict Court for the Northern District of linois ....

. Memorandum, Opinion and Order re sub-class for

purposes of settlement of March 14, 1978, of the

U.S. District Court for the Northern District of

Illinois

. Memorandum, Opinion and Order (class certifica-

tion) of October 13, 1977, of the U.S. District

Court for the Northern District of Dlinois ............

. Pre-Trial Order No. 1, July 6, 1977, entered by the

U.S. District Court for the Northern District of

Illinois

PAGE

3-60

61-78

79-83

84-92

93-96

ae, oe

3n the

Gnited States Court of Appeals

For the Seventh Circuit

May 4, 1979

Before

Hon. THOMAS E. FAIRCHILD, Chief Judge

Hon. WILLIAM J. BAUER, Circuit Judge

Hon. HARLINGTON Woop, JR., Circuit Judge

No. 78-2036

IN RE GENERAL MOTORS CORPORATION ENGINE

INTERCHANGE LITIGATION

Appeal of: Betty Oswald, on her own behalf and on

behalf of all other persons similarly situated, and Phil

Miller and Eileen Miller, on their behalf and on

behalf of all other persons similarly situated,

Plaintiffs-Appellants,

Vv.

GENERAL MOTORS CORPORATION,

Defendant-A ppellee.

Appeal from the United States District Court for the

Northern District of Illinois, Eastern Division.

No. MDL 308—Frank J. McGarr, Judge.

éalitins

ORDER

On consideration of the petitions for rehearing and

suggestions for rehearing in banc of Part VI of the

opinion in the above entitled cause by the plaintiff-

objectors, no judge in active service has requested a vote

thereon,* and all of the judges on the original panel have

voted to deny a rehearing. Accordingly,

IT IS ORDERED that the petitions for rehearing and

suggestions for rehearing in banc be, and the same are

hereby, DENIED.

Treating pages 13 through 15 of the petition for

rehearing filed by counsel for plaintiff-objectors Oswald,

Miller and Balog as a motion for reassignment on re-

mand pursuant to Circuit Rule 18, the judges on the

original panel have voted that the motion be, and the

same is hereby, DENIED.

* Circuit Judges Walter J. Cummings, Wilbur F. Pell, Jr.,

and Philip W. Tone disqualified themselves from any con-

sideration of the petitions for rehearing in banc filed in the

above cause.

Peer wa

—3—

3n the

Anited States Court of Appeals

For the Seventh Circuit

No. 78-2036

IN RE GENERAL MOTORS CORPORATION ENGINE

INTERCHANGE LITIGATION

Appeal of: Betty Oswald, on her own behalf and on

behalf of all other persons similarly situated, and Phil

Miller and Eileen Miller, on their behalf and on

behalf of all other persons Similarly situated,

Plaintiffs-A ppellants,

Vv.

GENERAL MOTORS CORPORATION,

Defendant-A ppellee.

Appeal from the United States District Court for the

Northern District of Illinois, Eastern Division.

No. MDL 308—Frank J. McGarr, Judge.

ARGUED SEPTEMBER 28, 1978—DECIDED FEBRUARY 26, 1979

Before FAIRCHILD, Chief Judge, BAUER and Woop,

Circuit Judges.

Woop, Circuit Judge. In 1976 the defendant, General

Motors (GM), began substituting engines produced by its

Chevrolet Division in many of the 1977 model year cars

produced by its Oldsmobile Division. The discovery of

the engine switch culminated in the commencement of a

plethora of lawsuits —_ GM in the state and federal

courts. The Judicial Panel on Multidistrict Litigation

he eM, nk NT

onli

transferred those actions which had been filed in the

federal courts to the United States District Court for the

Northern District of Illinois for consolidated pretrial

proceedings with several actions which were already

pending there. See 28 U.S.C. § 1407. The district court

certified that the actions could be maintained as a class

action and later po i the settlement of the actions

as to one of two subclasses of Oldsmobile purchasers.

This appeal is from the order of the district court

approving the subclass settlement. Although the facts

are lengthy, the litigation’s history complex, and the

resolution of the issues difficult, the issues may be stated

with relative simplicity:

First, is the district court’s order approving the

subclass settlement appealable?

Second, should counsel prosecuting the appeal be

limited to representing the interests of those class

members who objected to the settlement before the

district court?

Third, did the district court err by refusing to permit

appellants’ counsel to inquire into the conduct of the

negotiations that led to the settlement?

Fourth, did the district court err by dismissing with

prejudice the federal claims of those class members who

declined to release their state law claims pursuant to the

settlement agreement?

We find that this court does have jurisdiction to

entertain the appeal and hold that the trial court erred

in approving the subclass settlement. Consequently, we

reverse and remand the order of the district court with

instructions.

I. Facts

A. The Engine Interchange Litigation

Beginning in 1974, GM planners began considering

the manufacturing requirements for GM cars for the

1977 model year. By 1976 various GM management

committees began planning for extensive interdivisional

engine exchanges. Because the Chevrolet Division had a

a

significant surplus production capacity, GM planners

decided to rely on Chevrolet produced engines to meet

part of the engine requirements of GM’s Buick, Olds-

mobile and Pontiac Divisions.

To institute the engine interchange in the Oldsmobile

Division, GM used codes to identify the different engines

that would be used in its 1977 Oldsmobiles. The Rocket

350 V-8 engine produced by Oldsmobile, for example,

was given the code name “L34”: the Chevrolet engine

used in place of the Rocket was given the code “LM1.”!

Moreover, GM, over some objections by the Chevrolet

Division, decided to adopt a common engine color for all

of its engines. Thus, the distinctive red Chevrolet engine

became blue. Despite the planned Oldsmobile-Chevrolet

engine change, GM’s advertising, EPA gas mileage

disclosures, and communications to Oldsmobile dealers

referred to the changes by the use of the codes.

The switch from standard components to different

components in Oldsmobiles was not confined to engines.

GM used different components than it had used in previ-

ous years for other parts of the power train (the engine,

transmission, and drive axle) in some of its Oldsmobiles.

For reasons which do not appear with clarity in the

record, GM _ decided in 1976 to install in all 1977

Oldsmobile Delta 88 _— and sedans the THM 200

transmission instead of the THM 350, the transmission

traditionally used in those cars. The THM 200, like the

THM 350, is produced by GM’s Turbohydramatic

Division. The THM 200, originally designed for use in

the subcompact Chevette, was used in all 1977 Delta 88

coupes and sedans regardless of whether they contained

Oldsmobile or Chevrolet engines. The appellants main-

tain that GM’s advertising materials nevertheless indi-

cated that the THM 350 was standard equipment in all

1977 Deltas.

1 Three Chevrolet produced V-8 engines were used in 1977

Oldsmobiles: the LM1, a 350 engine equipped with a four-

barrel carburetor, the L65, a 350 engine equipped with a two-

barrel carburetor, and the LG3, a 305 cubic inch displace-

ment engine. The class wera ge, certified by the district

court includes all purchasers of Oldsmobiles with Chevrolet

engines regardless of which of the three Chevrolet engines the

purchasers actually received.

MN en rien) natn winner ven

wolne

The case before this court is a subset of the

Oldsmobile litigation spawned by the discovery of the

engine interchange. After filing suit in the Cook County

Circuit Court alleging violations of the Illinois Consumer

Fraud and Deceptive Business Practices Act, Ill. Rev.

Stat. ch. 121%, §§ 261-272, the Illinois Attorney General

filed suit in the federal court for the Northern

District of Illinois on behalf of the State of Illinois,

which had purchased a 1977 Oldsmobile with a

Chevrolet engine, and more than 100 other Oldsmobile

purchasers.? The complaint alleged that the sale of the

Oldsmobiles without disclosure of their engine source

violated the Magnuson-Moss Act, 15 U.S.C. §§ 2301-

2312, and sought certification of the action as a

* The Magnuson-Moss Act limits federal court jurisdiction

over class actions prosecuted under the Act to those actions in

which the amount of each individual claim is at least $25, the

total amount in controversy is at least $50,000, and the

number of named plaintiffs is at least 100. 15 U.S.C.

§ 2310(d\3). Otherwise, presumably every consumer com-

plaint alleging a violation of the Act could have been

maintained in the federal courts, without regard to the

amount in controversy, under 28 U.S.C. a" Compare

Barnette v. Chrysler Corp., 434 F. Supp. 1167 (D. Neb. 1977)

(individual action alleging a violation of the Act and seeking

recovery of the purchase price of a defective car could not be

maintained in federal court, because it failed to meet the

$50,000 requirement). On the other hand, the Act’s amount in

controversy requirements, by lowering from the usual $10,000

to $25 the amount necessary for individual claims but

requiring an aggregate amount of at least $50,000, reduce the

obstacles normally encountered in meeting the a

amount necessary to maintain a class action. See Snyder v.

Harris, 394 U.S. 332 (1969); Zahn v. International Paper Co.,

414 U.S. 291 (1973). The number of named plaintiffs required,

however, remains a substantial barrier to maintaining class

actions under the Act. It was enacted by Congress to prevent

“trivial or insignificant” class actions from being brought in

the federal courts. H.R. Rep. No. 93-1107, 93d Cong., 2d

Sess., Fy ree im [1974] U.S. Code Cong. & Ad. News 7702,

7724. Although the Illinois Attorney General’s complaint was

the only complaint to satisfy the last jurisdictional require-

ment, we attach no particular significance to this fact.

=

nationwide class action.? The Oswald and Miller actions

were later brought to the federal district court and

consolidated with the State of Illinois action before

Judge McGarr. Upon GM’s petition, the Judicial Panel

on Multidistrict Litigation transferred seven actions

then pending in other federal courts to the Northern

District for consolidated pretrial proceedings.‘

’ General Motors characterizes the case before this court as

“only the tip of a litigation a over GM’s interdivisional

engine use. The widespread publicity given to the engine

switch by the initial lawsuits bred additional lawsuits. Other

Attorneys General soon filed state court actions against GM

under state consumer protection statutes. Furthermore, many

individual car buyers started state court proceedings seeking

individual and sometimes class relief. Altogether, GM esti-

mates, over 300 engine interchange actions were filed spaoat

GM since March 1977. Forty-one of the suits were filed as

class actions and thirty-three were brought by state Attorneys

General. Some of the actions were initiated by purchasers of

1977 Buicks and Pontiacs which, like the Oldsmobiles in this

suit, were equipped with Chevrolet engines. At least two suits

were filed by owners of 1977 Buicks and Cadillacs, alleging

that they received cars equipped with Oldsmobile engines. See

In re GMC Engine Interchange Litigation, 441 F. Supp. 933

Faker sage 1977) (transferring actions to the Northern

District of Illinois for consolidated pretrial proceedings). GM’s

interdivisional engine program also prompted invegtigation by

the Federal Trade Commission. See GMC v. FTC, 1978-1

Trade Cas. 162,005 (N.D. Ohio 1977) (rejecting GM’s chal-

lenge to the authority of the Commission to undertake the

investigation). The bulk of the lawsuits, however, appear to

— — Oldsmobiles, the subject of the litigation before

is court.

‘ The Oldsmobile actions that eventually were consolidated

for pecs proceedings are: State of Illinois v. GMC, No. 77-

C-927 (N.D. Ill.); Oswald v. GMC, No. 77-C-1006 (N.D. IIl.);

Miller v. GMC, No. 77-C-1436 (N.D. Ill.); Skokwe Central

Traditional Congregation v. GMC, No. 78-C-1457 (N.D. IIl.);

State of Alabama ex rel. Baxley v. GMC, No. 77-P-0881-

N.D. Ala.); Creel v. GMC, No. CA-77-P-0440-S (N.D. Ala.):

atter v. GMC, No. CA-77-P-0659-S (N.D. Ala.); Balog v.

GMC, No. 77-443 (W.D. Pa.); Hannan v. GMC, No. 77-C-265

(E.D. Wis.); King v. GMC, No. M-77-24-CA (E.D. Tex.); Levine

v. GMC, No. 77-C-849 (E.D.N.Y.); Parker v. GMC, No. S-77-

0174(N) (S.D. Miss.).

(Footnote continued on following page)

ne Le ee Te ere

—8—

On July 22, 1977, the district court entered an order

adopting an agreement of the numerous counsel for the

plaintiffs in the consolidated cases. The order created an

executive committee of six attorneys to represent the

amr ap in all pretrial proceedings. See generally

anual for Complex Litiga‘ion §§ 1.92-1.93.5 Although

the committee was given broad power in the pretrial

proceedings, the order provided that the committee

could conduct settlement. negotiations only with the

consent of all counsel for the named plaintiffs.

On October 13, 1977, the district court certified the

consolidated cases as a class action. The order defined

the class as “{ajll persons ... who purchased 1977

Oldsmobile automobiles which without their knowledge

or consent, contained V-8 engines manufactured by the

Chevrolet Motor Division . . .” The court dismissed all

federal claims except the Magnuson-Moss claim and

declined to exercise its power to take pendent jurisdic-

tion over the related state law claims. The trial court

recognized that parallel state court actions were pend-

ing, but rejected GM’s position that the state pro-

4 continued

The various federal actions were consolidated before the

district court for en only. Although the actions

have not been consolidated for trial purposes, the appellants

do not contest, and we do not question, the district court’s

authority to approve a settlement of all the actions before it.

See 15 C. Wright, A. Miller & E. Cooper, Federal Practice

and Procedure § 3866 at 374-76 (1976); Weigel, The Judicial

Panel on Multidistrict Litigation, Transferor Courts and

Transferee Courts, 78 F.R.D. 575, 582-83 (1978).

The order certifying the class action found that each of the

named plaintiffs would adequately represent the class and

confirmed the representative status of each. Therefore we

need not decide whether all of the actions are technically

before us, because we find that the appeal of some of the

named plaintiffs is sufficient to permit this court to consider

the interests of all class members. See also Part III of this

opinion infra.

6 All citations in this opinion unless otherwise noted are to

the Manual’s fourth edition. Citations to particular pages

follow the pagination of the Wright and Miller edition.

=

ceedings should prevent ciass certification on the

Magnuson-Moss claim. Despite the certification of the

class, no notice to class members was mailed to inform

them of the pendency of the class action at that time.

B. The Settlement

Sometime during the fall of 1977, General Motors

entered into settlement negotiations with representatives

of the various state Attorneys General who had filed or

were contemplating filing actions against GM. A

representative of the Illinois Attorney General who was

also a member of the executive committee participated

in the negotiations without leave of the district court or

other counsel for the plaintiffs in the federal class

action. On December 13, 1977, one of the counsel for the

plaintiffs received word that a tentative settlement

agreement had been reached by GM and the Attorneys

General. The attorney, in essence, requested the district

court to order immediate disclosure of the progress of

the settlement negotiations or any agreements that had

been reached. The trial court, however, regarded the

motion as premature. Unwilling to interfere with

communications between GM and the Attorneys General

before an agreement was reached, the district court

declined to order the requested relief. The trial judge

remarked that he believed he had sufficient power over

the approval of any settlement to protect the interests of

class members.

Six days later on December 19, the Illinois Attorney

General in his capacity as one of the class counsel moved

that the district court consider the settlement agreement

between GM and all but five of the fifty state Attorneys

General.’ The proposed settlement provided that GM

would provide to each consumer who had purchased a

1977 Oldsmobile, Buick or Pontiac equipped with a

6 GM maintains that the negotiations were begun at the

suggestion of the Consumer Protection Committee of the

National Associaticn of State Attorneys General.

7 Several other state Attorneys General have since joined in

the agreement.

~~

Chevrolet engine on or before April 10, 1977, $200 plus

a 36-month or 6,000-mile extended warranty on the

power train. In return each purchaser would be

required to sign a release of all state and federal claims

concerning the substitution of engines, components,

parts, and assemblies in the car. GM also agreed to

disclose the source of all engines of new GM cars for the

next three years. The Attorneys General, in turn,

promised to secure dismissals with prejudice of all

actions prosecuted by them.

The district court showed itself willing to consider the

agreement as a basis for settling the class action.

Although the court afforded private counsel time to

conduct discovery to determine whether the settlement

was fair, it denied the motion of some of plaintiffs’

counsel for discovery into the negotiations between the

Attorneys General and GM. The court maintained that

the — process was irrelevant to the central

issue of the fairness of the settlement.

Furthermore, the district court entertained GM’s

motion to redefine the class to include only those

Oldsmobile purchasers to whom the settlement agree-

ment contemplated payment. The class originally in-

cluded all 1977 Oldsmobile purchasers who bought their

cars before October 13, 1977, without knowledge that

the cars had Chevrolet engines. The settlement agree-

ment contemplated narrowing the class to purchasers

before April 11, 1977. In an order dated March 14, 1978,

the trial court denied GM’s motion to redefine and

narrow the class. The court did, however, designate “for

purposes of sending the settlement notice” a subclass of

whey 11 purchasers.’ Notices informing class mem-

rs of the pendency of the class action were sent out

shortly thereafter. The notice to settlement subclass

members, in addition to informing them of the pendency

8 The trial court also agreed with GM to broaden the class in

one respect. The court, for the purpose of settlement only,

struck the no-knowledge-or-consent requirement of the origi-

nal class certification as to members of the settlement subclass.

This conformed the subclass to the precise class of Oldsmobile

purchasers contemplated by the GM-Attorneys General

agreement.

OR SN ge

_

of the action, informed them of the proposed settlement

and gave them the opportunity, inter alia, to opt-out of

the action or to object to the proposed settlement. The

notice to class members not in the settlement subclass

merely provided notice of the action and the opportunity

to opt-out.

In May 1978, pursuant to its authority under Fed. R.

Civ. P. 23(e), the district court held a fairness hearing to

determine whether it should approve the settlement.

Because some of the private counsel objected to the

settlement, the hearing was contested and lasted twelve

days. The order of proof was irregular. Both sides

submitted numerous exhibits. The plaintiff-objectors

presented, among others, several 1977 Oldsmobile owners

who objected to the settlement and two mechanics who

testified that the substituted power train was inferior to

the one GM allegedly warranted. GM relied largely on

exhibits and the testimony of a Chevrolet staff engineer

who testified that the power trains warranted and those

provided were comparable.

On July 17, 1978, after considering post-hearing

memoranda of the various sides in the litigation, the

district court entered an order approving the subclass

settlement as fair. —— GM’s proposed findings of

fact almost verbatim, the district court found that the

engines and other parts included in the Oldsmobiles

were “comparable” to those warranted. Resolving most

of the other contested issues in favor of GM, the district

court ordered the action dismissed as to all members of

the subclass and directed GM to send an approved notice

of settlement to each member of the subclass. Before the

notice could be mailed, however, some of the plaintiff-

objectors prosecuted this appeal.®

® After the notice of appeal was filed, the Illinois Attorney

General made a motion before the trial court requestin

rmission to send the settlement notice (with additiona

anguage indicating the pendency of the appeal) to subclass

members. The trial court held that the appeal deprived it of

ol por yo to entertain the motion, but indicated that if it

ad had jurisdiction, it would have granted the motion. The

Attorney General then, with the apparent acquiescence of the

(Footnote continued on following page)

=

II. Appealability

The plaintiff-objectors prosecuting this appeal and

GM agree that this court has jurisdiction to hear this

appeal. The attorney for one of the plaintiffs and an

ohiecter to the settlement before the trial court,

however, maintains that the trial court’s order ap-

proving the settlement is neither a final decision nor a

collateral order within the meaning of 28 U.S.C.

1291..° Of course, we cannot determine this court’s

jurisdiction by majority vote of counsel appearing before

us and, even if the parties unanimously agreed to appeal

the order, we would be required to raise the issue sua

sponte. Levin v. Baum, 513 F.2d 92 (7th Cir. 1975).

There is only one apparent obstacle to our hearing this

appeal. The trial court’s division of the class into two

subclasses arguably makes this a multi-party action

® continued ’

plaintiff-proponents and GM, moved this court for relief

under Fed. R. App. P. 8a). Because the contents of the notice

were at issue on this appeal, we took the motion under

advisement. Our decision on the merits of the appeal

necessarily hed ag sending out the notice in its present

form. Accordingly, we hereby deny the motion.

10 Disagreement between attorneys for the class, as_ will

become apparent, has become the norm in the conduct of this

litigation. For our purposes, counsel for the class may be

divided into basically three groups. Those who objected to the

proposed settlement in the trial court shall be referred to as

plaintiff-objectors. Despite the division over the appealability

issue, the attorney contesting the jurisdiction of this court to

entertain the appeal is a member of this group. Those private

counsel who supported the settlement shall be referred to as

a ane. Finally, the Attorneys General from

llinois and Alabama who represented named plaintiffs in the

trial court constitute the third ipr- The latter two groups

have aligned themselves with GM on many of the issues in

this appeal.

onditine

subject to the requirements of Fed. R. Civ. P. 54(b).! In

an order following its approval of the subclass settle-

ment, the trial court refused to make a determination

that there was no just reason for delay and to direct

entry of judgment. We hold that, despite the refusal of

the trial court to enter judgment pursuant to Rule 54(b),

we have jurisdiction to review the order approving the

subclass settlement as a collateral order.”

The Supreme Court has taken an “intensely practical”

. roach when deciding whether eg are appeal-

able. Mathews v. Eld , 424 U.S. 319, 331 n.11 (1976).

In close cases the determination must be made by

balancing the “inconvenience and costs of piecemeal

review” against “the danger of denying justice by delay.”

Gillespie v. United States Steel Corp., 379 U.S. 148, 152-

53 (1964). We are cognizant that the federal policy

against piecemeal review admits no exception merely

because the judgment appealed from affects the conduct

1 There is considerable doubt whether Fed. R. Civ. P. 54(b)

was intended to govern the situation when two distinct sub-

classes are created from a single class and one subclass’ right

to recover under a settlement neither affects nor is affected b

the merits of the other subclass’ claim. Aside from the dif-

ficulty of construing “multiple parties” to encompass separate

subclasses, the settlement of one subclass’ suit arguably

should be treated as a separate lawsuit outside the ambit of

Rule 54(b). This practical view of the position of the sub-

classes accords with the legal effect of a subclasses un-

der Fed. R. Civ. P. 23(cX4). That rule at es that when a

class is subdivided “each subclass [shall be] treated as a class,

and the provisions of this rule shall then be construed and

applied accordingly.” Each subclass must independently meet

the requirements of Rule 23 in order to be maintained as a

class action, 7A C. Wright & A. Miller, Federal Practice and

Procedure § 1790 at 191-92 (1972), and therefore it seems con-

sistent with the spirit of the rules to treat each subclass action

as a separate action for all purposes.

12 Because we find that even if Rule 54(b) encompasses the

present litigation that an independent basis for jurisdiction

exists, we need not attempt to reconcile Rule 23 with Rule

54(b). Collateral orders are appealable without the express en-

try of judgment under Rule > See Swanson v. American

wen Industries, Inc., 517 F.2d 555, 560-61 (7th Cir.

=

of a class action. See Coopers & Lybrand v. Livesay, 98

S. Ct. 2454 (1978) (striking the death knell for the death

knell doctrine); Weit v. Continental Illinois National

Bank & Trust, 535 F.2d 1010 (7th Cir. 1976) (order

— notice to class members is not a collateral

order). We believe, however, that although the federal

courts have narrowly interpreted the collateral order

doctrine established in Cohen v. Beneficial Industrial

Loan Corp., 337 U.S. 541 (1949), that this case falls

within “that small class which finally determine claims

of right separable from, and collateral to, rights

asserted in the action, too important to be denied review

and too independent of the cause itself to require that

appellate consideration be deferred until the whole case

is adjudicated.” Jd. at 546.

The first requirement of the collateral order doctrine

is that the matter appealed from must have been finally

determined by the district court.!* This does not require

that the trial court be without power to reverse its

ruling; it only requires that no further consideration be

likely. 15 C. Wright, A. Miller & E. Cooper, Federal

Practice and Procedure § 3911 at 470 (1976). The record

amply indicates the trial judge’s resolve not to recon-

sider the fairness of the subclass settlement. After the

long fairness hearing, the trial court approved the

settlement in an order with fairly extensive findings of

fact. The order purported to immediately dismiss the

claims of all subclass members. Afterward, the trial

court on two occasions declined to reconsider its

decision. Moreover, although the trial court retained

jurisdiction over the settlement subclass action to

supervise the implementation of the settlement, this left

the trial court with only the ministerial task of

executing its judgment. The trial court’s order, there-

fore, is not tentative and it finally determines the matter

appealed to this court.

13 “There are two aspects of the final judgment rule. One is

that the order be the final disposition of the entire case. The

other is that the order be the final disposition of the issue. The

Cohn rule permits a limited exception with respect to the first

aspect but not with respect to the second.” Rodgers v. United

States Steel Corp., 508 F.2d 152, 159 (3d Cir.), cert. denied, 423

U.S. 832 (1975).

15

The second requirement of the collateral order

doctrine is that the matter appealed must be “separable

from, and collateral to, rights asserted in the action” and

neither affect nor be affected by decision on the merits.

337 U.S. at 546. Application of this requirement to

appeals from decisions on the fairness of a settlement

resents some difficulties. Ordinarily settlements of civil

litigation are not reviewed by federal courts. Thus, the

issue is raised almost exclusively in class or derivative

actions.4 One court of appeals, however, has held that a

refusal of a trial court to approve a class action

settlement to be “collateral,” Norman v. McKee, 431 F.2d

769 (9th Cir. 1970), cert. denied, 401 U.S. 912 (1971), and

another has reviewed such a refusal without expressly

considering the appealability issue, Jn re International

House of Pancakes Franchise Litigation, 487 F.2d 303

(8th Cir. 1973).%

— approval nf append is | ag og 4 at

ankruptcy reorganization proceedings. See, ¢.9., | ctive

Coounilies be I t Stockholders of TMT trailer Ferry,

Inc. v. Anderson, 390 U.S. 414 (1968).

16 The Second Circuit has recently rejected the position taken

by the Eighth and Ninth Circuits and refu to review a

trial court’s refusal to approve a settlement of a shareholders

derivative action. Seigal v. Merrick, Nos. 77-7566, 77-7576 (2d

Cir. Dec. 14, 1978). ause this eppeal challenges the trial

court’s approval of a settlement, we need not align this court

on one side of this conflict between the Circuits. This appeal

because of the subclassing of Oldsmobile purchasers for the

purposes of settlement presents a situation unlike those which

ordinarily confront class members or shareholders after the

trial court’s approval or gy ty of a proposed settlement

of a representative action. In Seigal the court stated that “[an

approved] settlement ... is not a deviation from the main

ath of the litigating process. It is a step on that path directly

eading to fina ag mei An approval of a Ay after

appropriate notice, becomes a final judgment.” Slip op. at 657.

In the case at bar, the trial court’s approval of the subclass

settlement does not lead directly to final judgment. But unlike

a or of a settlement, the trial court’s order looks

toward neither a renewal of settlement negotiations nor a trial

on the merits. Thus, the danger of appellate court interference

with proceedings before the trial court is small in comparison

with the danger of denying justice by delay.

it~

Although in Norman the court maintained that appel-

late review of the initial determination of the settle-

ment’s fairness was completely divorced from the merits

of the claim, adequate review of the fairness of a

settlement necessarily requires some examination of the

underlying cause of action. 15 C. Wright, A. Miller & E.

Cooper, Federal Practice and Procedure § 3911 at 385

(1976); see Manual for Complex Litigation § 1.46 at 56.

See also Coo & Lybrand v. Livesay, 98 S. Ct. at 2458

(“the class determination generally involves considera-

tions that are ‘enmeshed in the factual and legal issues

comprising the plaintiff's cause of action’ ”). Neverthe-

less, several factors bring this appeal within the

separateness requirement. First, the Supreme Court

has not — the requirement that the issue be

“separate” from the merits to require the precise

division of the issues presented on appeal and the

elements of the underlying cause of action that a

semanticist might expect. See National Socialist Party

v. Village of Skokie, 482 U.S. 43 (1977). Moreover, to the

extent that this a raises issues about the regularity

of the conduct of the settlement negotiations or the

fairness hearing, consideration of the merits of the

, cause of action is unnecessary. Similarly,

cause appellate courts will reverse a trial court’s

determination on the fairness of a settlement only if there

is a clear abuse of discretion, consideration of the merits

is necessarily something less than penetrating.

Finally, the order approving the settlement is, in one

sense, completely separate from the merits of the action.

The trial court’s approval of the settlement precludes

any decision on the merits of the settlement subclass’

claim because the claim will never go to trial.

The third requirement of the collateral order doctrine

is that the rights asserted would be lost, probably

irreparably, if review were delayed until the conclusion

of proceedings in the district court. It is unlikely that

the claims of the post-April 10, 1977, Oldsmobile

purchasers will be decided any time soon. GM has made

clear its intention not to settle with that subclass.

Therefore years of litigation before the entire class

action is concluded is possible. In the meantime, the

=— =

settlement, if executed, contemplates the release of state

and federal claims by those class members who accept

the settlement package and dismissal of the Magnuson-

Moss claims for those who do not. If the settlement is

later undone on appeal, ordering reimbursement by

those who accepted the $200 and received benefits under

the cn firs 384 insurance policy would be practically

impossible.!* Those signing releases might also lose their

state claims against GM because of the running of the

statutes of limitation. Conversely, those who decline to

sign the release, may file and pursue state claims. Any

judgment in the state courts may possibly bar subse-

quent action on their Magnuson-Moss claims.

We conclude that “delay of perhaps a number of years

in having [their] rights determined might work a great

injustice” to the subclass members. Gillespie v. United

States Steel Corp., 379 U.S. 148, 153 (1964). They “can-

not make important decisions about ... further par-

ticipation in this suit without age [their] rights deter-

mined now.” Diaz v. Southern Drilling Corp., 427 F.2d

‘6 These characteristics of the settlement approved by the

trial court distinguish this apes: from the appeal which was

dismissed for lack of an yg able order in v. United

States Steel Corp., 541 F.2d 365 (3d Cir. 1976). In Rodgers the

trial court permitted the defendant to communicate to in-

dividual members of the class an offer to enter _into individual

settlements. See Rodgers v. United States Steel Corp., 70

F.R.D. 639 (W.D. Pa. 1976). See also Part VI of this opinion

infra. The trial court eee rere the communication of

the offer; it did not finally determine the rights of any

member of the class. See 541 F.2d at 370. In the present case,

the trial court dismissed the federal claims of all settlement

subclass members and effectively terminated their participa-

tion in the class action whether they released their claims or

not. Moreover, the settlement offer in Rodgers merely promis-

ed payment of back pay in return for signed releases. The

Court of Appeals, dismissing the appeal, noted that the par-

ties could be returned to their original positions if the release

was subsequently invalidated. Jd. at 371. Here, we cannot say

with any degree of certainty that we could later return to GM

the benefits that class members received under the

mechanical insurance policy.

~~

1118, 1123 (5th Cir.), cert. denied, 400 U.S. 878 (1970).2”

The possibility that later appellate review would be

effective is simply too slight.

A final requirement of the collateral order doctrine is

that the order must present “important and unresolved

legal questions.” Wert v. Continental Illinois National

Bank & Trust Co., 535 F.2d 1010, 1015 (7th Cir. 1976);

Weight Watchers, Inc. v. Weight Watchers International,

Inc., 455 F.2d 770, 773 (2d Cir. 1972). We think this

appeal raises at least two important questions concern-

ing the proper balance between the general policy of

encoura ng settlements and a court’s specific og | to

insure the fairness of class action settlements. The first

question involves the scope of discovery which should be

afforded to objectors to proposed class settlements which

were negotiated under questionable circumstances.

7 Cf. Pettway v. American Cast Iron Pipe Co., 576 F.2d

digys) 1221 (5th Cir. 1978), cert. denied, 47 U.S.L.W. 3475

The court’s November 20 order required awardees

wishing to opt into the settlement to do so by December

15, 1975 or be deemed to have opted out of the subclass.

This created a dilemma for dissatisfied subclass members,

who were faced with the equally unpalatable alternatives

of ware 5 into a possibly invalid settlement or being

rele to individual lawsuits. A decision to opt into the

settlement by endorsing the back pay check and thereby

—— the coneeny of all liability for past discrimina-

tion might preclude entitlement to a share in a new a

ment or award if the settlement were invalidated on

appeal. On the other hand, a decision to opt-out of the sub-

class by failing to cash the tendered check would create

the possibility of receiving no back pay award if the

appeal were unsuccessful and an individual lawsuit

proved unrealistic. .. .

_ The procedure adopted by the district court, by requir-

ing claimants to choose whether or not to opt into the

settlement before they could exercise their right to

appellate review, unfairly burdened the rights of

awardees to appeal the settlement and thereby significant-

ly undermined one of the most important procedural

rotections associated with the approval of a settlement.

e hold that the ability of subclass members to opt into a

back pay settlement may not be terminated before a final

determination of the propriety of that settlement is made.

~19—

Because adequate representation is the foundation of all

representative actions, see Fed. R. Civ. P. 23(a)4),

Hansberry v. Lee, 311 U.S. 32 (1940), we think this ques-

tion is appropriately reviewed at this time. The second

uestion concerns the nature of the “settlement” that

ule 23(e) authorizes the trial court to approve. Because

this question goes to the power of the district court in

the settlement of representative actions, we believe it is

sufficiently important to receive appellate consideration

now.

In conclusion, the trial court’s order is not tentative; it

is capable of review without extensive examination of

the merits; it raised issues which could not be effectively

reviewed later; and it presents important, unresolved

legal questions for consideration by this court. We hold

that the trial court’s order approving the subclass settle-

ment is an appealable collateral order.

III. Motion to Limit the Appeal

Before oral argument, the attorney representing the

State of Alabama in this litigation presented to this court

a “motion to limit appeal to certain named appellants.”

The motion seeks to have the effect of this court’s deci-

sion limited to (1) only the named plaintiffs, Oswald and

Miller, the plaintiff-objectors prosecuting this appeal or,

alternatively, (2) only those class members who filed ob-

jections to the ange settlement in the district court.

We consider the arguments in support of the second

alternative first.

It is argued that this court’s decision in Research

Corp. v. Asgrow Seed Co., 425 F.2d 1059 (7th Cir. 1970),

— this court to restrict the representative standing

of the named plaintiffs who prosecute this appeal to

those class members who objected to the settlement in

the trial court. In Research, the appellants were

members of a defendant class represented in the district

court by numerous named defendants. Despite adequate

notice, the appellants failed either to request exclusion

from the defendant class or to object to a proposed

settlement negotiated by the named defendants; the

appellants attacked the fairness of the settlement for the

—20—

first time on appeal. This court held that the failure of

the appellants to intervene in the action foreclosed their

right to appeal. Here it is argued by analogy that each

individual subclass member who failed to object to the

settlement before the trial court has waived the right to

appeal and the right to be represented by others on

appeal. We think the argument is without merit.

There is no doubt that the named plaintiffs, Oswald

and Miller, preserved the right to appeal. They are par-

ties to the lawsuit; intervention was obviously un-

eras Moreover, through their attorneys they

vigorously objected to the settlement in the district court

and created a record adequate for appellate review.

Thus, the issue raised by the motion may be refined to

whether Oswald and Miller through their counsel may

represent the interests of absent subclass members on

this appeal.

We would be reluctant to hold that absentee class

members waive appellate review merely because they

failed to take affirmative action when their interests

were already being adequately represented by par-

ticipants in the lawsuit. Cf. Ace Heating & Plumbing Co.

v. Crane Co., 453 F.2d 30, 32-33 (8d Cir. 1971) (objectors’

failure to opt-out of a class action does not preclude

appellate review). To do so would unnecessarily restrict

the representational character of all class actions. We

need not reach the issue here, however, because the

notice of the pro subclass settlement informed sub-

class members that if they neither opted out of the sub-

class nor intervened in the lawsuit that “attorneys for

the named plaintiffs will represent your interest in these

suits.” We think subclass members who received the

notice could reasonably rely on class counsel to protect

their interests by prosecuting an appeal from the judg-

ment of the district court if necessary. See Gonzales v.

Cassidy, 474 F.2d 67 (5th Cir. 1973) (failure to appeal

approval of an unfair settlement constitutes inadequate

ph sobering We therefore decline to hold that

absentee subclass members waived their right to have

the settlement reviewed by this court.

The second argument advanced in favor of limiting

the representative capacity of the plaintiff-objectors on

this appeal is that the pretrial order of the trial court

vested the power to conduct all pretrial actions on behalf

of the class in the attorneys’ executive committee.

Because the executive committee did not authorize the

prosecution of the appeal, it is argued, the authority of

counsel for the plaintiff-objectors must be confined to

representing the individual named plaintiffs before this

court.

We question initially the premise that it is the at-

torney, not the named plaintiff, who possesses the power

to appeal the approval of a settlement. “(T]he decision to

appeal a class action judgment must rest with class

. not class counsel. Pettway v. American Cast

ron Pipe Co., 576 F.2d 1177-78 (5th Cir. mete y cert.

denied, 47 U.S.L.W. 3475 (1979). Since the pretrial order

did not purport to restrict the representative capacity of

the named plaintiffs prosecuting this appeal, it would

seem that the argument misses the mark. The court in

Pettway, however, acknowleged that “no clear concept of

the allocation of decision-making responsibility between

the attorney and class members has yet emerged.” Jd. at

1176. Consequently, assuming arguendo the premise that

the class attorney is the dominus litus, we consider and

reject the argument that the pretrial order prohibits

counsel for Oswald and Miller from representing the in-

terests of the class before this court.

The pretrial order does not on its face vest the power

to appeal in the executive committee. The order itself

only lists the committee’s various duties and powers

relating to pretrial proceedings. We would be extremely

reluctant to imply a provision that restricts the right to

appeal decisions of the trial court. Furthermore, even if

the pretrial order contemplated giving the executive

committee the power to prohibit individual attorneys

from appealing, whether the executive committee has

done so is unclear. The minutes of the committee

meeting show that the committee did pass a motion that

no appeal be taken from the trial court’s approval of the

settlement. Nevertheless, those minutes also indicate

that before passage of the motion “{t]he chair ruled that

—

the motion does not proclude [sic] anyone from appeal-

ing but states the position of the majority of plaintiffs’

counsel.”

We believe that the question of whether an appeal

should be made and the scope of that appeal should be

answered by determining the best interests of the class.

The plaintiff-proponents maintain that the settlement is

fair, that the approval of the trial court is correct, and

that the matter is best left unreviewed by this court.

Plaintiff-objectors, of course, disagree. The purpose of

Fed. R. Civ. P. 23(e) is to protect the interests of

absentee class members; the danger of abuse is high and

the protection of their interests cannot be left to class

counsel alone. Rule 23 imposes on the trial court in the

first instance, and on this court eventually, the duty to

examine the fairness of proposed settlements. Limiting

the representative capacity of the appellants on this

appeal would effectively negate this court’s obligation to

act as the guardian of the class. We do not believe that

the interests of class members are best served by leav-

ing the settlement unreviewed. Cf. McDonald v. Chicago

Milwaukee Corp., 565 F.2d 416, 471 n.1 (7th Cir. 1977)

(permitting briefs and oral arguments by parties who

failed to file a separate notice of appeal because the case

involved “issues inextricably bound up with” those

properly before the court). Restricting the appeal would

only leave the door open to additional individual appeals

by those who decline to accept the settlement offer. A

series of individual and possibly conflicting appellate

decisions on the propriety of the settlement would un-

dermine the representative nature of class actions

significantly and sacrifice the public’s interest in

judicial economy unnecessarily. We hold that plaintiff-

objectors Oswald and Miller are parties who through

their counsel will fairly and adequately protect the in-

terests of the class in this saneel See Fed. R. Civ. P.

23(aX4) (requirement for class certification).

We do not hold “that each individual plaintiff and

lawyer must be permitted to do what he pleases in

litigation as complex as this, and can behave in total dis-

regard of the interest of other litigants and of the

class... .” Farber v. Riker-Maxson Corp., 442 F.2d 457,

= =

459 (2d Cir. 1971). We note the following factors which

convince us that the interests of the class will be well

represented on this appeal. Cf. Pettway v. American

Cast Iron Pipe Co., 576 F.2d 1157, 1178-80 (5th Cir.

1978), cert. denied, 47 U.S.L.W. 3475 (1979) (discussing

factors relevant to determining whether the named

plaintiff may appoint new counsel to appeal the ap-

proval of a settlement negotiated by former class

counsel). First, the named plaintiffs and their counsel

were among the first to file engine switch suits against

GM. Second, counsel for the appellants was a member of

the class executive committee and is well acquainted

with the litigation. Despite suggestions and innuendoes

of ulterior motives in some of the briefs which we can

only regard as symptoms of “the ‘brief writer’s hyper-

bole’ syndrome,” United States ex rel. Sims v. Sielaff, 563

F.2d 821, 824 n.6 (7th Cir. 1977), nothing in the record

indicates that appellants’ counsel has acted with other

than the best interests of the class in mind. Third,

although vocal objection to the settlement among class

members was not widespread, “the sentiment of the

class is but one factor in our analysis of the appealabili-

ty question.” Pettway, 576 F.2d at 1178. In Patterson v.

Stovall, 528 F.2d 108 (7th Cir. 1976), this court heard

the appeal of objectors to a class action settlement even

though the objectors constituted only .0018% of all class

members and their claims constituted only .0022% of all

claims. Jd. at 109 n.1. See also Mandwano v. Basic

Vegetable Products, Inc., 541 F.2d 832 (9th Cir. 1976)

(reversing settlement even though only 4% of the class

was in active opposition to it). Fourth and finally, we

find that the issues raised on appeal are far from

meritless.18

We conclude that the best interests of the class

warrant that this court review the fairness of the settle-

ment as it affects the entire class. Consequently, we con-

sider the merits of the objections to the trial court’s ap-

proval of the proposed settlement.

18 In Patterson v. Stovall, 528 F.2d at 109 n.1, we noted:

“Aithough in terms of the class and settlement [appellants’]

number and size might be considered miniscule, the serious

issues raised before this Court are not reduced in their

magnitude.”

—

IV. Conduct of the Settlement Negotiations

The plaintiff-objectors challenge the refusal of the

trial court to permit them to conduct discovery into the

settlement negotiations. They contend that the trial

court’s order prohibiting discovery and the court’s

limitation of examination of the Assistant Illinois

Attorney General during the fairness hearing prevented

them from being able to determine whether the

proposed settlement was fair, reasonable and adequate.

The trial court’s order limiting discovery evidences its

belief that how the settlement was reached was

irrelevant to the issue of the fairness of the settlement.!9

The court’s findings of fact, although finding the

irregular method of negotiating the settlement did not

ab ae subclass members, reaffirmed the court’s

lief that the objection was irrelevant to the adequacy

of the settlement “and would not constitute sufficient

grounds to withhold an otherwise fair settlement from

consideration by the subclass members.”

We think that the conduct of the negotiations was

relevant to the fairness of the settlement and that

the trial court’s refusal to permit discovery or examina-

19 The plaintiffs’ second set of interrogatories requested that

GM identify all documents that it relied upon during the

course of the negotiations. The interrogatories also asked GM

to state “the highest demand made by the various State At-

torneys General in the course of the negotiations with defen-

dant and identify all factual support for such demand, as well

as any documents which relate to such demand or factual sup-

port.” The trial court entered an order ruling that the process

of the negotiations was not open to discovery. During the

fairness hearing, although the court permitted some question-

ing of the Assistant Illinois Attorney General about the time,

place and other aspects of the negotiations, it refused to per-

mit inquiry into what transpired during the negotiations.

GM maintains that the plaintiff-objectors waived this issue

by failing to recall the Assistant Illinois Attorney General

alter being given the opportunity to do so. The record,

however, clearly indicates that, given the trial court’s limita-

tion on the scope of examination, any further questioning by

the objectors would have been futile. The objectors brought

the issue to the attention of the trial court and cannot be

deemed to have waived it.

FA AE 5 OA Mra

—25—

tion of the negotiations constituted an abuse of dis-

cretion.2° In addition, we do not think that the record

adequately supports the court’s conclusion that the

seemingly irregular conduct of the negotiations did not

prejudice the interests of the class. We must, therefore,

reverse the trial court’s order approving the settlement.

This court has several times commented on the trial

court’s continuing duty to undertake a stringent exami-

nation of the adequacy of representation by the named

class representatives and their counsel at all stages of

the litigation. McDonald v. Chicago Milwaukee Corp.,

565 F.2d 416, 419 (7th Cir. 1977); Susman v. Lincoln

American Corp., 561 F.2d 86, 89-90 (7th Cir. 1977). The

trial court’s duty to undertake such an inquiry arises

from the requirement that it find that “the representa-

tive parties will fairly and mg yr protect the

interests of the class.” Fed. R. Civ. P. 23(aX4). The trial

court’s duty is heightened by its responsibility to review

20 Neither GM nor the Illinois Attorney General has argued

that the conduct of the settlement negotiations is protected

from examination by some form of privilege, and we find no

convincing basis for such an objection here. Although par-

ticular documents or discussions conceivably could be immune

from discovery as attorney work product or as privileged

attorney-client communications, the existence of such

rivileges is best determined in the context of particular

emands for discovery. Inquiry into the conduct of the

ae gage is also consistent with the letter and the _ of

Rule 408 of the Federal Rules of Evidence. That rule only

governs admissibility. It simply bars admission of evidence of

compromise negotiations to prove liability or damages and ex-

pressly provides that it “does not require exclusion when

evidence is offered for another purpose... .” The rule is

grounded on the policy of encouraging the settlement of dis-

uted claims without litigation. That policy is not undermined

our decision here. Participants in negotiations to settle

class actions are aware that Rule 23(e) requires the trial

court’s approval of any settlement reached. Moreover, they are

or shoul aware that the court will inquire into the conduct

of the negotiations. See Manual for Complex Litigation § 1.46

at 53-54. To the extent such inquiry discourages settlements,

it should only discourage those negotiated in circumstances so

irregular as to cast substantial doubt on their fairness.

~S—

the fairness of any compromise of the class action. Jd.

23(e).2!

The Manual for Complex Litigation provides that

inquiry into the conduct of settlement negotiations is

pertinent to the court’s examination of the settlement.

Manual for Complex Litigation § 1.46 at 53-54.2 It

recommends that before sending a notice to class mem-

bers of a proposed settlement and before considering the

substantive fairness of the settlement, the trial court

should conduct a preliminary hearing to determine

whether the proposed settlement is “within the range of

possible approval.” Jd. Among the questions which merit

judicial examination at the “probable cause hearing,”

the Manual lists:

Who were the negotiating parties and to what

extent were they authorized to proceed with the

settlement of their class’ claims and possibly those

of other classes?28

Among the reasons for examining whether settlement

negotiations were authorized is the danger of defendant

“attorney-shopping.”

[A] person who unofficially represents the class

during settlement negotiations must be under

strong pressure to conform to the defendants’ wishes

. . . . LAJn individual, lacking official status, knows

that a negotiating defendant may not like his

21 “Before — a settlement, therefore, the judge must

assure himself that the class has been adequately represented

during the settlement talks, a conclusion which will not follow

recy gw from a = adequacy for litigation pur-

ses.” Developments in the Law—Class Actions, 89 Harv. L.

v. 1318, 1537-38 (1976). See also Wolfram, The Antibiotics

Class Actions, 1976 A.B. Foundation Research J. 251, 361.

22 We recognize that the Manual does not provide “an inflexi-

ble formula or mold into which all . . . pre-trial procedure

must be cast.” Manual for Complex Litigation at xix; see Mc-

Donald v. Chicago Milwaukee Corp., 565 F.2d 416, 420 (1977).

In appropriate cases, however, the Manual does provide a

rough guide by which to measure whether the trial judge

acted within his discretion. We rely on it in that manner here.

rn Manual for Complex Litigation § 1.46 at 53 (Consideration

=— =

“attitude” and may try to reach a settlement with

another member of the class.

Id. at 59 quoting Ace Heating & Plumbing Co. v. Crane

Co.. 453 F.2d 30, 33 (3d Cir. 1971). Thus, unauthorized

settlement negotiations create the possibility of negoti-

ation from a position of weakness by the attorney who

purports to represent the class.4 In addition, the

prestige attendant upon negotiating a large settlement

against a corporate defendant and thereby acquiring

reputations as consumer advocates may place public

attorneys in a situation analogous to private counsel who

hope to win large fee awards.” The possibility of such a

conflict of interest as a general rule warrants judicial

scrutiny of unauthorized settlement negotiations. Fur-

thermore, settlement negotiations with less than all class

counsel weaken the class’ tactical position even if the

attorney who enters into the negotiations attempts to

represent the class’ interests vigorously.”

24 The court, to be sure, will not approve a settlement if it is

unfair, but “fairness” may be found anywhere within a

broad range of lower and upper limits. No one can tell

whether a compromise found to be “fair” might not have

been “fairer” had the negotiating [attorney] possesse

better information or been animated by undivided loyalty

to the cause of the class. The court can reject a settlement

that is inadequate; it cannot undertake the partisan task

of bargaining for better terms. The integrity of the

negotiating process is, therefore, important.

Haudek, The Settlement and Approval of Stockholders’

Actions—Part II: The Settlement, 23 Sw. L.J. 765, 771-72

(1969).

26 Cf. Developments in the Law—Class Actions, 89 Harv. L.

Rev. 1318, 1552 (1976) (noting the conflict of interest created

not only by counsel seeking large fees after settlement, but

also by counsel pursuing “his own ideological goals without

regard to the desires of class members”).

2 A time-honored litigating tactic for a defendant en-

circled by multiple claimants is to weaken the total force

of the attack little by little. The defendant first enters into

settlements with the strongest of the plaintiffs. Then it

faces the remaining plaintiffs, now isolated and aban-

doned, with the threat of long and lonely litigation to force

a final round of settlements at terms favorable to the

defendant.

Wolfram, The Antibiotics Class Actions, 1976 A.B. Foundation

Research J. 251, 264.

= =

Finally, unauthorized settlement negotiations deny

other class counsel access to information about the

negotiations which is helpful in evaluating the fairness

of the settlement. AE options considered and rejected,

the topics discussed, the defendant's reaction to various

proposals, and the amount of compromise necessary to

obtain a settlement”? were all matters which class

counsel excluded from the negotiations needed to

consider before exercising their fiduciary duties to the

class by accepting the settlement.

The record before this court contains facts which cast

some doubt on the adequacy of the representation of the

class during the settlement negotiations and the fairness

of the resulting settlement. These facts warranted in

this instance more probing into the conduct of the

settlement negotiations that the trial court permitted.

The record establishes that the settlement presented to

the court by the !llinois Attorney General was either (1)

negotiated without the permission of the other class coun-

sel in the federal action as required by the court’s first

pretrial order or (2) negotiated by the Attorney

General’s office in a capacity other than class counsel in

this action. The pretrial order prohibited the class

counsel executive committee from entering into settle-

ment negotiations without the consent of all plaintiffs’

attorneys. The Attorney General’s Assistant was a

27 Developments in the Law—Class Actions, 89 Harv. L. Rev.

1318, 1562 (1976).

28 Cf. Girsh v. Jepson, 521 F.2d 1538, 157 (3d Cir. 1975):

It is little comfort to objector Frackman that plaintiffs’

counsel may have examined the documents sought by ob-

o— during the course of . . . discovery. As an objector,

rackman was in an adversary relationship with both

plaintiffs and defendants and was entitled to at least a

reasonable opportunity to discovery against both.

See also National Conference of Commissioners on Uniform

State Laws, Te aoags Uniform Class Action Act § 12(cX4)

reprinted in 32 Bus. Law. 83, 94 (1976) (notice of propose

settlement to class members shall include “a description and

oe of alternatives considered by representative par-

ies”).

—29—

member of the committee and therefore subject to the

pretrial order’s restrictions. Nevertheless, he partici-

pated in negotiations with GM without the consent of

other counsel.

If the negotiations did proceed in violation of the trial

court’s pretrial order,2? we think that the plaintiff-

29 The trial court found that at least some private counsel

knew of the a pope between GM and the Attorneys Gener-

al in advance of the settlement. The knowledge of some counsel,

however, falls short of the authorization contemplated by the

trial court’s pretrial order. That order authorized the class

counsel executive committee to conduct negotiations, but only

with the consent of all counsel for the named plaintiffs. The

trial court made no finding that all class counsel were aware

of the negotiations between GM and the Attorneys General.

Moreover, knowledge of the existence of the negotiations does

not necessarily indicate consent to the negotiations for the

purpose of settling the federal action. We do not question the

right of the state Attorneys General to settle their parallel

state lawsuits against GM without the approval of —

counsel in the federal class action. Their authority to do so is

unquestioned even though the settlement of state actions may

have some collateral impact on the federal action, e.g., reduc-

ing the size of the class by affording relief to some class

members. Here, however, the negotiations were conducted not

only to settle the state actions, but also to settle the federal

class action. We find no indication in the record that private

counsel were aware that the negotiations would have such a

broad effect until immediately before the announcement of

the GM-Attorneys General agreement.

After the submission of the proposed settlement agreement,

six of the private counsel in the federal action did agree to

support the settlement. The district court relied on the

plaintiff-proponents’ support as a factor indicating both the

absence of prejudice from the circumstances of the

settlement’s negotiation and the settlement’s fairness. See

Manual for Complex Litigation § 1.46 at 53 (Consideration 5).

The support of some private counsel after being presented

with the agreement as a fait accompli does not amount to a

ratification of the conduct of the negotiaticns. As noted supra,

class counsel should know the options considered and the

topics discussed during the negotiations before supporting a

settlement as fair. In the absence of such fainiliarity of

counsel with the conduct of the settlement negotiations, the

inference of fairness to drawn from their support is

weak. Cf. id. at 64 (“a plan should not be approved simply

because counsel on both sides recommend it”),

—30—

objectors were entitled to discovery to determine

whether the negotiations may have prejudiced the

interests of the class. Moreover, even if discovery failed

to reveal identifiable prejudice, the exclusion of the

private counsel from the settlement negotiations should

weigh heavily against approval of the settlement. “(T]he

excluded plaintiff might well have improved the settle-

ment terms, and while this may be hard to demonstrate,

the cee of the compromise should not be helped

by a difficulty of proof created by their improper

conduct.” Haudek, The Settlement and Approval of

Stockholders’ Actions—Part II: The Settlement, 23 Sw.

L.J. 765, 770 (1969).°°

The Assistant Illinois Attorney General maintains,

however, that his participation in negotiations between

the state Attorneys General and GM did not violate the

pretrial order because he was not negotiating as a class

representative in the action in the federal court but

rather was negotiating as a representative of the State

of Illinois in the parallel state proceedings in the Circuit

30 Thus, although the proponents of any class settlement

always bear the burden of proof on the issue of fairness,

Manual for Complex Litigation § 1.46 at 56, proponents who

improperly negotiate a settlement should bear the heavier

burden of establishing fairness by clear and convincing

evidence. This does not unduly hamper settlements since the

disapproval of the settlement always permits the renewal of

negotiations between all of the proper participants in the

class action. The se of prejudice aside, it is clear that

the trial court did not require the proponents of the settle-

ment proposed here to meet such a heavy burden. In fact, the

trial court accepted the proposed settlement as prima facie

fair and shifted to the objectors at least the burden of produc-

ing evidence disproving the fairness of the settlement.

Whether the trial court shifted the burden of persuasion to

the objectors as well is unclear. The objectors complain that it

did and the Illinois Attorney General’s brief seems to concede

the point. The trial court’s conclusions of law, however, recite

that it placed the burden of persuasion on the proponents. Our

comparison of the record with the findings of fact leads us to

believe that as to some of the court’s findings that it may in-

deed have misplaced the burden.

=~

Court of Cook County.2! The motion of the Illinois

Attorney General for leave to file the settlement took

this position also, although the motion’s first paragraph

based the Attorney General’s capacity to present the

motion on his status as counsel for the State of Illinois,

31 During the fairness hearing, Mr. Mulack, the Assistant I]-

linois Attorney General, described his position as one in which

he wore “two hats.”

[T]he Attorney General filed a State Court action. . . in

the Circuit Court of Cook County, on March 7th of

1977... . Ltize weeks later we filed the Federal Action.

So as I told the Court, on several occasions, as we had

appeared here during the motions on behalf of the class

certification, I was wearing two hats—and the Attorney

General of Illinois was, likewise, wearing two hats; one as

a plaintiff, under the State Court action, under the Con-

sumer Fraud Act, in the Circuit Court of Cook County,

and the other as a punitive class representative in the

Federal Court Action. ...

I was perfectly aware of the limitations in Pre-Trial

Order No. 1, that | wang either myselt or any

representative of the Attorney General’s office from tak-

ing part in nationwide negotiations on this particular class

action. With that particular concern and that understand-

ing, I had approached the posture of the overall negotia-

tions.

Now, attendant at those meetings were Assistant At-

torneys General literally from every state that had a ma-

jor action going against General Motors. Each of those At-

torneys General were there in their state capacity only—

they were only concerned about their state lawsuits, as I

was concerned, only, about my state lawsuit.

At the opening salvo—the opening introductions of the

settlement negotiations—as people were being introduced

and from which state they attended, and as General

Motors’ attorneys were being introduced, as I was being

introduced, I made this caveat on the record, that “I’m

here only as an Assistant Attorney General on behalf of

the State of Illinois case; I am not here, at all, as any class

representative, or on behalf of the nationwide action; and

if any discussions are brought up about the nationwide

class action, I cannot participate, because that is not my

function.” With that caveat, we proceeded to discuss those

particular matters attendant to the settlement.

(Footnote continued on following page)

—-— =

one of the designated class representatives in the federal

action. Also consistent with his position that he did not

participate in the settlement negotiations as a federal

class representative, the Assistant Attorney General

admitted during the fairness hearing that the Illinois

Attorney General’s office did not obtain consent to the

settlement from the over 100 named private plaintiffs

that the Illinois Attorney General represented in the

federal action.

The State of Illinois is a representative party in this

suit solely because it purchased a 1977 Oldsmobile with

a Chevrolet engine. The Illinois Attorney General’s

ability to maintain the suit on Illinois’ behalf as a class

action is governed solely by Rule 23.32 In the absence of

statutory authorization, Illinois cannot maintain this

action in federal court as a parens patriae action.

31 eantinued

We note that the written settlement agreement between GM

and the Attorneys General devoted much space and went into

considerable detail reciting the rights and obligations of the

parties to the negotiations with respect to the settlement of

the federal action. For example, the agreement, mentioning

the Magnuson-Moss class action by name, required the At-

torneys General, inter alia, to seek amendment of the class

certification to conform with that group of consumers to

whom GM would extend its offer, to represent to the trial

court that the proposed settlement was fair and reasonable,

and to recommend that the court approve the settlement of

the —_ action in accordance with the terms of the agree-

ment.

See State of Iowa v. Union Asphalt & Roadoils, Inc., 281

F. Supp. 391, 401-02 (S.D. Iowa 1968); State o Minnesota v.

United States Steel Corp., 44 F.R.D. 559, 576 (D. Minn. 1968).

7 Cf. Hawaii v. Standard Oil Co., 405 U.S. 251, 266 (1972)

(“Parens patriae actions oe. in theory, be related to class ac-

tions, but the latter are definitely preferable in the antitrust

area. Rule 23 provides specific rules for delineating the ap-

propriate plaintiff-class, establishes who is bound by the ac-

tion, and effectively prevents duplicative recoveries”)

The class action although it also ak hae a vehicle for

furthering the substantive policies behind legislation, is

primarily a device to vindicate the rights of individual class

(Footnote continued on following page)

= ae

Assuming arguendo that the Attorney General’s office

did not violate the pretrial order and thus participated in

the negotiations solely as a representative in the parallel

state court action, we believe, nevertheless, that the trial

judge should have opened up the negotiations to

scrutiny, if only to dispel the questions which naturally

arise from the unusual posture of the case. If the

settlement was not negotiated by authorized class

counsel in the capacity of class counsel in this action,

than it was negotiated in the name of, at best, only one

of the named olaintiffs in the federal action, the State of

Illinois. This stretches the theory of re resentation of

absentee interests by the named plaintiff to its limit®

and warrants searching judicial examination of the

circumstances surrounding and the matters discussed

during the settlement negotiations before acceptance of

the proposed settlement for possible approval.

33 continued

members. We also note that the Magnuson-Moss Act does

rovide that the United States Attorney General and the

Fodueas Trade Commission aa & to federal court to enjoin

violations of the Act. 15 U.S.C. § 2310(c). Thus the Act

provides its own mechanism for protecting the general

ublic’s interest in enforcement of its provisions. It does not

eave protection of the public interest up to the Attorneys

General of the fifty states. Compare 15 U.S.C. §§ 15a-15h (ex-

plicitly vesting power in state Attorneys General to maintain

actions against persons engaged in anti-competitive practices

which harm state consumers).

% In their briefs and during oral argument the parties

devoted a deal of time to a discussion of whether a settle-

ment could be approved over the objections of some of the

named plaintiffs. We agree with General Motors that the un-

animous approval of all named plaintiffs is not a prerequisite

to judicial approval of a settlement approved by some of the

named plaintiffs. See McDonald v. Chicago Milwaukee Corp.

565 F.2d 416 (7th Cir. 1977). This case does not present, and

we need not here decide, GM’s admittedly extreme position

taken during oral argument that the trial court can approve a

settlement offered unilaterally by a class action defendant

with the approval of neither a class representative nor class

counsel. Here, at least the State of Illinois, a named plaintiff,

agreed to settle.

=

Several additional facts suggest that the representation

of the class during the negotiations was less than

vigorous. The class settlement was reached relatively

early in the course of the action. The federal action had

been filed about nine months before; the class had been

certified only two months before; and notice to class

members of the pendency of the action had not even

been mailed. Although discovery had commenced, GM’s

answers to many of the requests were less than

completely responsive. Moreover, because the pro d

settlement contemplated the release of all claims

relating to component substitutions, not just the engine

interchanges, the range of possibie damages to class

members was unclear. It is not possible to tell from the

record how fully informed the Attorneys General may

have been about the value of the claims they were

surrendering.*®

Not only was the settlement arguably hasty, but also

the settlement agreement contemplated the abandon-

ment of the prosecution of the claims of post-April 10

class members.*’ The settlement agreement entered into

by the Attorneys General obligated them to seek

settlement of the entire class action even though the

agreement obligated GM to offer payments to only part

of the certified class. The agreement contemplated

narrowing the class certified to those who purchased

Oldsmobiles before April 11, 1977, despite the original

certification of the class to include those who purchased

before October 18. GM subsequently formally moved

the court for such a revised class definition to conform to

35 See Manual for Complex Litigation § 1.46 at 53 (Con-

sideration 1).

% Jd. (Considerations 2 & 3). The record does not reveal and

the briefs of the parties do not detail the extent to which the

Attorneys General had proceeded with discovery in their

parallel state actions or whether they examined the value of

the claim for the entire power train. The trial court’s order

precluding discovery of the conduct of the settlement

negotiations, of course, prevented the objectors from making

such a record. To this day, we have no idea how the par-

ticipants in the negotiations arrived at the settlement package

of $200 plus the extended power train warranty.

37 See id. at 54 (Consideration 6).

-_

the settlement agreement. The court denied GM’s

motion, but did decide to create a subclass for

settlement purposes. Although the abandonment by the

Attorneys General of the claims of post-April 10

purchasers does not by itself warrant the reversal of the

settlement of the claims of the pre-April 11 purchasers,

it does indicate that the representation during the

negotiations may have been inadequate as to all

ee purchasers who constituted the original

class.%8

38 We must note that the means by which the trial court

attempted to create a subclass also may have seriously jeopar-

dized the rights of the a purchasers. Aside from

the tactical disadvantage of having their claims separated

from the claims of the other class members, the subclassing

technique chosen by the court raises doubts about whether

those outside the ambit of the settlement could maintain a

-— action after the settlement with the pre-April 11 sub-

class.

The trial court has broad discretion in determining whether

to allow a class action to be maintained, Jimenez v.

Weinberger, 523 F.2d 689 (7th Cir. 1975), cert. dented, 427

U.S. 912 (1976), King v. Kansas City Southern Industries, Inc.,

519 F.2d 20 (7th Cir. 1975), and must necessarily have an

equally broad range of discretion in determining whether to

create subclasses pursuant to Fed. R. Civ. P. 23 (eX4XB). Divi-

sion of a class or potential class into subclasses to account for

differences in_proof that may be required at trial is clearly

rmissible. See, e.g., Dorfman v. First Boston Corp., 62

.R.D. 466, 476 (E.D. Pa. 1973) (creating subclasses to ac-

count for differences between class members who purchased

before and after relevant information received wide public

circulation). The trial court’s discretion, however, is bounded

by the requirements of the applicable law and in this case we

believe that the trial court overstepped the bounds of the

Federal Rules of Civil Procedure.

The trial court’s order creating the settlement subclass did

not conform to the requirements of Rule 23 which provides in

pertinent part that when pe ay “a class m divided

into subclasses and each subclass treated as a class, and the

provisions of this rule shall then be construed and applied ac-

cordingly.” Fed. R. Civ. P. 23(cX4B). The rule contemplates

that at least two subclasses will be formed and requires that

each independently meet the requirements of Rule 23 for the

maintenance of the class action. See Monarch Asphalt Sales

Co. v. Wilshire Oil Co., 511 F.2d 1073, 1077 (10th Cir. 1975).

(Footnote continued on following page)

~~

_ One final matter casts doubt upon the circumstances

in which the settlement was negotiated by the Attorneys

General. The settlement agreement contains GM’s prom-

ise to compensate the Attorneys General $150,000 “for

all the expenses they have incurred in connection with

the subject matter of this Agreement.” Allocation of the

proceeds is left solely to the Attorneys General. The

agreement also commits GM to pay private attorneys’

fees in the federal action “in an amount no greater than

the amount of documented time actually expended .. .

38 continued

The trial court made no ne that the post-April 10 sub-

class could be maintained as a class action. The record shows

instead that the trial court a to create a single sub-

class for the settlement, leaving the post-April 10 purchasers

in the original class. No attempt was made to test whether the

nonsettlement subclass action met the requirements of Fed. R.

Civ. P. 23(a) & (b). Furthermore, the record does not indicate

whether any named plaintiff in the current action is even in

the nonsettlement subclass. The subclass could be “headless,”

thus raising serious questions about whether the trial court

could proceed to consider _the gowrsy 10 claims. See

— Winokur v. Bell Federa oe ed & Loan Associa-

tion, F.2d 271 (7th Cir. 1977), cert. denied, 435 U.S. 932

1978); Susman v. Lincoln American Corp., 587 F.2d 866 (7th

ir. 1978); Satterwhite v. ty: of ville, 578 F.2d

987 (5th Cir. 1978) (en banc); Goodman v. Schlesinger, 584

F.2d 1325 (4th Cir. 1978). Even if a named plaintiff is before

the trial court, no showing has been made that he desires to or

will adequately represent the subclass.

The uncertainty about the viability of the subclass action on

behalf of class members who purchased their cars after April

10, 1977, is significant. The notice to these subclass members

informing them of the pendency of the action has been sent

out. The subclass members, therefore, may rely on the federal

class action to vindicate their interests. If it is later deter-

mined that the action cannot be maintained, the statutes of

er a may preclude individual lawsuits in the state

courts.

_ The questions raised about the viability of the subclass ac-

tion if the settlement of the other subclass action is executed

illustrate the inadvisability of creating tentative subclasses for

settlement purposes without careful examination of the ade-

quaey, of the representation of each subclass. Cf. Manual for

mplex Litigation § 1.46 at 59-61 (condemning tentative

classes for settlement purposes).

=x =

multiplied by the hourly fee prevailing ... in the

community.” These amounts were in addition to the

amounts promised class members accepting the settle-

ment. The notice to subclass members informed them of

even less than was provided by the agreement,°** and the

record does not provide any reliable estimate of the

aggregate amount of attorneys’ fees and expenses that

GM will eventually pay. We think the proposed settle-

ment’s estimate of attorneys’ fees and expenses is so

vague that subclass members could not determine the

possible influence of attorneys’ fees on the settlement in

considering whether to object to it.“

39 The notice to subclass members merely stated:

As part of the Agreement with the Attorneys General

General Motors agreed to pay an aggregate amount 0

$150,000, to be divided among those Attorneys General,

including the Attorney General of Illinois, accepting the

Agreement, in payment for expenses claimed to have

been incurred in connection with the subject matter of

their litigation. The amount of any attorneys’ fees, costs

or expenses to be paid to the attorneys for the private

plaintiff purchasers in the class litigation will be subject

to the review and approval by the Court. Any award of

costs, expenses and/or fees to the — plaintiff

purchasers and their counsel in the class litigation will be

in addition to, and not deducted from, the $200.00 offered

by General Motors per automobile purchased as part of

the proposed settlement.

40 The record does indicate that GM and six of the nine

teams of private attorneys have reached an understanding, if

not agreement, about attorneys’ fees. The pape ay | is

that EM will not object to a request by those counsel for fees

up to $360,000, but that private counsel are free to request

that the court award a larger amount. Like the provision for

expenses of the Attorneys General, this understanding leaves

the allocation of the payment a matter for determination by

the recipients of the payment. The agreement apparently con-

templates that no requests for fees will be made until the end

of all of the litigation, including that concerning the rights of

post-April 10 purchasers.

41 See Manual for Complex Litigation § 1.46 at 54 (Con-

sideration 7).

~~

Aside from some doubt about whether Attorneys

General who, of course, are compensated by the public

may ever recover attorneys’ fees and expenses,‘? we

believe that the method by which the GM-Attorneys

General y duper y contemplates payment of private

attorneys’ fees and expenses is questionable. The Manual

condemns settlement agreements which provide

that the fees and sometimes expenses of plaintiffs’

counsel are to be paid separately by the defen-

dant(s) over and above the settlement. Frequently,

the amount thereof is not disclosed at the time the

settlement is proposed. Such an arrangement

should not be permitted. All amounts to be 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.

The effect of such an arrangement is to neutralize

the court’s power and responsibility to pass upon

the reasonableness of the amounts to be teid 1 to

plaintiffs’ counsel since any reduction by the court

‘2 The Manual regards the question of whether publicly

employed counsel may be allowed reimbursement for ex-

penses as an “interesting” and apparently open one. Jd. § 1.44

at 42. It notes that expenses and attorneys’ fees have been

allowed to state Attorneys General in several class action

settlements. See also In re Coordinated Pretrial Proceedings in

Antibiotic Antitrust Actions, 410 F. Supp. 706 (D. Minn.

1975). On the other hand, several district courts have

preferred state Attorneys General as counsel in class actions,

in because the Attorneys General presumably would not

seek attorneys’ fees. See State of Illinois v. Ha & Row

Publishers, Inc., 301 F. Supp. 484, 494-95 (N.D. Ill. 1969);

State of Minnesota v. United States Steel Corp., 44 F.RD. 55

577 (D. Minn. 1968); cf. State of Ohio v. Richter Concrete Corp.,

69 F.R.D. 604 (S.D, Ohio 1975) (permitting state Attorney

General to communicate with putative class members after

class certification was denied because salaried Attorney

General, unlike private attorneys, had no interest in soliciting

litigation or fees). We need not meet the question posed by the

Manual. On this record it is not clear that the expenses of the

Attorneys General to be reimbursed are those incurred in the

litigation before the federal court. It is fair to assume that a

large ric ar ogy of the expenses, if not all, are due to state

court litigation.

ap

in the amount counsel agree upon after the class

settlement has been approved will simply go to

reduce the aggregate amount defendant(s) will pay

and will not increase the amount to be paid to the

plaintiffs. As a result, there is little incentive for

the judge to reduce the agreed upon fees. On the

other hand, the effect of such an arrangement 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. Only if the

aggregate of all payments to be made by defendants

is disclosed in the proposed settlement can the class

members and the court make any intelligent

judgment as to the fairness and reasonableness of a

proposed settlement.

Manual for Complex Litigation § 1.46 at 62. This court

has previously declined to upset a settlement agreement

merely because some problems regarding fees and

expenses remained unresolved. See McDonald v. i e.

Milwaukee Corp., 565 F.2d 416, 426 (7th Cir. 1977). We

do not overrule that decision, but do regard the

—— rovision made for expenses and attorneys’

ees as one factor requiring examination of the settle-

ment negotiations.

In conclusion, we hold that the trial court abused its

discretion by failing to undertake a careful examination

of the conduct of the settlement negotiations and by

preventing the plaintiff-objectors from showing that the

negotiations |g een the best interests of the class.

Regardless of which of the two possible capacities the

Illinois Attorney General’s office assumed in negotia-

ting the proposed settlement, the conduct of the

negotiations was irregular and the record contains too

much evidence tending to indicate prejudice to the class

to permit us to allow the trial court’s order to stand.

Because, however, our decision upsets a settlement of

considerable magnitude and because complex class

actions are often, although not always, settled before

_ we conclude with a discussion of what we do not

old.

1

We do not hold that irregular settlement negotiations

may never form the basis for a judicially acceptable

class action settlement. In fact, a prior decision of this

court has approved a settlement negotiated in somewhat

similar circumstances. See McDonald v. Chicago Mil-

waukee Corp., 565 F.2d 416 (7th Cir. 1977).4° We realize

that the system of state and federal courts often

generates simultaneous litigation over the same subject

matter. We recommend that an attorney who is counsel

in both state and federal actions request leave of court

before entering into settlement negotiations. In addition,

the trial court should probably require as a condition to

such leave at least that the attorney inform other

counsel in the proceedings of the matters discussed

during the separate negotiations. Although this practice

is preferable, the failure to follow it is not necessarily

reversible error if the record clearly indicates that

representation of the class during the negotiations was

adequate and that the settlement itself is fair.“

‘8 In McDonald the objectors to a settlement contested, inter

alia, the negotiations conducted in connection with a related

state court action. The 19 208 ewes had begun prior to the

commencement of the federal action which was filed only

after the negotiations broke down, 565 F.2d at 420.

Negotiations resumed prior to class certification, but largely

because the trial court delayed certification of the class dur-

ing the negotiations. Significantly, the trial court was never

afforded an opportunity to pass on the issue of the propriety of

= negotiations because the objector failed to raise the issue

ere.

In this case, a pretrial order expressly limited the conduct

of settlement negotiations. The objectors raised the issue

before the trial court by seeking discovery and by questioning

the Assistant Illinois Attorney General during the fairness

hearing. The trial court when given a chance to consider the

conduct of the negotiations ruled that the matter was irrele-

vant. Finally, the record contains some evidence suggesting

that the settlement negotiations prejudiced the class.

“ Although the trial court concluded that the settlement of

the subclass action was fair, our discussion of the conduct of

the settlement negotiations verona A casts doubt upon that

conclusion. Moreover, that matter aside, we are not convinced

that the court’s conclusion finds clear support in the record.

(Footnote continued on following page)

“ continued

The most important factor relevant to the fairness of a class

action settlement is the strength of plaintiff's case on the

merits balanced against the amount offered in the settlement.

Manual for Complex Litigation § 1.46 at 56. Conceptually, this

requires a comparison of the amount offered with the product

of (1) the probability of plaintiff's evans on the merits

times (2) the present value of probable damages laintiff

would recover if he did prevail. We do not expect the trial

court’s conclusions to be sei forth with mathematical preci-

sion. A fairness hearing is not a trial on the merits. The trial

court, however, does have a duty to members - the class and

to the reviewing court to assess, if not decide ne issues of law

which weigh heavily in the above calculus and to consider the

most probative evidence bearing on those issues.

The trial court’s findings contain no express discussion of

the merits of the Magnuson-Moss claim. Indeed, with respect

to the alleged transmission switch in Delta 88s, the court ap-

arently misapprehended the nature of the objectors’ claims.

The court noted that all Delta 88 coupes and sedans contained

the THM 200 regardless of whether they had Chevrolet or

Oldsmobile engines. The gist of objectors’ claim, as we under-

stand it, is that the transmissions used simply were not those

warranted. Thus, the fact that all Delta 88 sedan and coupe

purchasers received the smaller transmission is irrelevant. If

objectors’ contention is correct, GM breached its warranty to

alt Delta purchasers, not just those who received Chevrolet

engines.

On the issue of compensatory damages, the trial court fram-

ed the issue as the M gee igrhewng of the Oldsmobile engines

allegedly warranted and those Chevrolet engines received.

The findings then recite a mass of technical data indicating

that the durabili performance and fuel economy of the

Chevrolet and Oldsmobile engines were not materially .

different. The evidence on these technical issues was conflic-

ting, but we are more concerned by the district court’s failure

to apply the ordinary measure of damages for breach of

warranty: “the difference . . . between the value of the goods

accepted and the value they would have had if. bps had been

as warranted... .” U.C.C. § 2-714(2) (emphasis added). This

is presumably the measure of damages contemplated by the

drafters of the Magnuson-Moss Act. Yet, the court found it

unnecessary to resolve an evidentiary conflict on the value of

the engines. The objectors presen evidence tending to es-

tablish a difference in va.ue of over $400. GM presented

evidence that the cost of manufacture was virtually the same.

Although neither form of evidence was the “best” evidence of

value. this is a matter upon which the proponents of the settle-

(Footnote continued on following page)

nil

“ continued

ment had the burden of proof. Manual for Complex Litigation

§ 1.46 at 56. The trial court should have made a more precise

estimate of probable compensatory damages. Cf. id. at 61 (“in

view of the complexity which ordinarily attends settlement

issues, it is wise in most cases to rely upon proven facts, par-

ticularly economic facts”).

Finally, we question the court’s resolution of the possibilit

of recovering = damages against GM. The court declin

to consider whether punitive damages are recoverable under

the Magnuson-Moss Act because it found the evidence

insufficient to permit an inference that GM acted in willful

disre of the rights of Oldsmobile Banteay re We think

the o me resented substantial evidence tending to show

that GM deliberately concealed the source of the engines in

the cars that it sold as Oldsmobiles and that it did so to

increase profits. Moreover, we cannot say that the possible

recovery of punitive damages should not have received any

weight because _ were unavailable under the Magnuson-

Moss Act. Although one opinion published after the trial

court’s approval of the settlement intimates that the Act does

not permit punitive damages, it does not resolve the issue. See

Novosel v. Northway Motor Car Corp., 460 F. SuRp. 541

(N.D.N.Y. 1978). In any event, that decision_is binding on

neither this court nor the district court. The Act itself

provides “for dam and other legal and equitable relief.”

15 U.S.C. § 2310(dX1). Although this broad language falls

short of express statutory authorization for an award of

—— damages, we do not believe as GM does that punitive

amages are never recoverable under federal law unless

arent authorized. See Globus v. Law Research Service, Inc.,

418 F.2d 1276, 1284 (2d Cir. 1969), cert. denied, 397 U.S. 913

(1970); Comment, Punitive Og ay Under Federal Statutes:

A Functional Analysis, 60 Calif. . Rev. 191 (1972). Although

the legislative history of the Act is silent on the matter, we

think it is not unlikely that Congress intended to provide at

least the same relief available under state law for breach of

warranty. Although punitive damages are usually unavailable

for actions sounding in contract, see U.C.C. ad 1-106(1),

McGrady v. Chrysler Motors Corp., 46 Ill. App. 3d 136, 360

N.E.2d 818 (1977); Hibschman Pontiac, Inc. v. Batchelor, 340

N.E.2d 377 (Ind. “yp 1976), this sapere rule is subject to

exceptions. Punitive damages may be awarded, for example,

when the breach amounts to an independent tort or is

accompanied by fraudulent conduct. See Sullivan, Punitive

Damages in the Law of Contract: The Reality and the Illusion

of Legal Change, 61 Minn. L. Rev. 207 (1977); 3 Williston on

ane) § 25-13 (4th ed. 1974); R. Nordstrom, Sales § 155

(Footnote continued on following page)

—

Similarly, we do not hold that the failure of the trial

court to hold a preliminary hearing prior to the mailing

of the notice of the —— settlement is inevitably

reversible error. Although we believe such a hearing is

better practice and the Manual for Complex Litigation

recommends it, this court has gone as far as to affirm

the approval of a settlement when no evidentiary

hearing on its fairness was held before or after the notice

to the class. See Patterson v. Stovall, 528 F.2d 108 (7th

Cir. 1976). We do hold the record in this case raises so

many questions about the adequacy of representation

during the settlement negotiations that we cannot say

the record clearly supports the trial court's. conclusion

that the negotiations did not prejudice the interests of

the settlement subclass.”

We noted in McDonald v. Chicago Milwaukee Corp.,

565 F.2d 416, 422 (7th Cir. 1977), that “Per se rules often

represent the abdication of judicial discretion rather

than its informed exercise.” Consequently, this court has

declined to adopt se rules rigidly confining the trial

court’s exercise of its discretion ir the supervision of

class actions. This does not relieve us, however, of our

duty to reverse the trial court’s judgment when we are

convinced that there has been a clear showing of an

abuse of that discretion. On the facts of this case, the

irregular conduct of the negotiations, the failure of the

trial court to examine the irregularities thoroughly, and

44 continued p

We do not decide here that an award of punitive damages is

appropriate under the Magnuson-Moss Act or that if it were

that class members would be entitled to them. We do believe,

however, that the possibility of such a recovery is not

insubstantial and that’ this possibility as well as the probable

compensatory damages were given insufficient weight by the

trial court in the ealculus of the fairness of the settlement.

4 Thus, we do not hold that the representation of the class

members during the negotiations was in fact inadequate. The

record simply does not provide any basis for us to tell. We do

note, however, that this is not the first class action in which

the State of oe has es a ae ge yr _

articipation of other counsel representin e class.

| ea v. J. W. Petersen Coal & Onl Co., BF RD. 531 (N.D.

Ill. 1973).

alii

the evidence in the record indicating that the irre i

gulari-

ties may have damaged the interests of the class

convince us that such a clear showing has been made.

The judgment of the trial court approving the settle-

ment, accordingly, must be reversed.

V. Form of the Settlement

Even if we were not constrained to reverse the trial

court’s approval of the settlement because of the

circumstances surrounding its negotiation, we would

have to find the settlement defective in another respect.

Although the defect may affect only a small portion of

those to whom GM’s offer would be extended, conveni-

ence and expediency cannot justify the disregard of the

individual rights of even a fraction of the class. As an

appellate court we are without power to rewrite the

settlement of the parties. We only have the authority to

approve or disapprove the settlement in the form it is

presented to us.‘

The settlement order gives subclass members two

options. If the subclass member signs a release he will

receive the settlement package and his Magnuson-Moss

claim will be dismissed.47 But even if the subclass

member refuses to accept GM’s offer and refuses to sign

the release, the order nevertheless dismisses with

prejudice the subclass member’s federal claim.4® The

“6 Patterson v. Stovall, 528 F.2d 108, 111 (7th Cir. 1976).

‘7 The signed release, of course, operates to

’ ' preclude the

accepting subclass member from proceedin

claims he may have against GM. ’ ota

‘8 The relevant paragraphs ,

provide: paragraphs of the trial court’s order

4. The action on behalf of subclass

accept and receive the settlement shall Bp poy

dismissed as to defendant General Motors with prejudice.

5. The action on behalf of subclass members w

not accept the settlement shall be and is hereby 1 Tans ew

as to defendant General Motors. Dismissal as to those

persons shall be without prejudice solely to their rights to

ag such other remedies as may be otherwise available

em.

—15—

subclass member is presented with an accept-or-else

situation: if he does not accept, his federal claim is lost

even though he cannot receive the benefits of the

settlement package. We have searched the reported

decisions in vain for precedent for such a settlement.

Finding none and being of the opinion that the dismissal

of the action is fundamentally unfair to nonconsenting

subclass members, we cannot permit the settlement in

its present form to stand.

GM argues that the form of the settlement is not

unusual. It argues that nonconsenting class members

are bound by a class settlement even if it is approved

over their objections. Moreover, it argues, the very

purpose of the 1966 amendments to Rule 23 was to

eliminate the spurious class action in which potential

class members could obtain the rewards of a favorable

suit, but escape being bound by an unfavorable outcome.

Thus, GM would have us hold that the dismissal of the

Magnuson-Moss claims of nonconsenting subclass mem-

bers is permissible. Finally, GM goes on to argue that

“(t]he settlement does allow class members, even at this

late stage, to reject it and pursue state law remedies. To

the extent nonconsenting class members are allowed to

pursue any future litigation rights by the settlement. . .

it is more favorable to them than federal law or policy

require.” We do not disagree with GM’s arguments in

the abstract. In the context of the particular settlement

here which attempts to settle both state and federal

claims, however, we must disagree.

We consider GM’s last argument first. A fundamental

characteristic of the federal courts is their limi

jurisdiction. In the same pretrial order in which the

trial court certified the class, it also expressly declined

to take pendent jurisdiction over the state claims

presented by the pleadings. Therefore GM’s contention

that the settlement was more favorable than federal law

requires presumably because the trial court could have

forced subclass members to accept the settlement

package in return for all state and federal claims is

without merit. The trial court, having declined jurisdic-

tion over the state claims, was without power to

extinguish them. The form of settlement with its unusual

1

use of individual releases was apparently agreed to by

GM and the Attorneys General in recognition of the

federal court’s inability to settle the state claims of

subclass members.*® The opt-out provision which permits

nonconsenting subclass members to pursue state rem-

edies is a necessary consequence of the limited jurisdic-

tion of the federal courts.

We do not disagree with GM’s statement that class

members can be bound by a settlement over their

objections and that the same is true of objecting named

plaintiffs.5°° Similarly, we agree that Rule 23 was

49 The use of individual releases to effectuate a class action

settlement, although unusual, is not unprecedented. See 3 H.

Newberg, Class Actions § 5620p (1977).

50 In a brief amicus curiae the Congressional sponsors of the

Magnuson-Moss Act, Senator Warren G. Magnuson and

Representative John E. Moss, also attack the form of the

settlement approved by the trial court. The Congressional

sponsors maintain that the class members’ federal rights

under the Act cannot be settled or compromised by a class

representative without each class member’s individual con-

sent. They would have us hold that to the extent that Fed. R.

Civ. P. 23(e) authorizes the settlement of class actions over the

objections of some class members, it is inapplicable to class

actions maintained under the Magnuson-Moss Act. Because

we find that the form of settlement in the case at bar was not

authorized by the Federal Rules, discussion of this argument

is not strictly necessary to our decision. We discuss the issue

raised, however, so as not to discourage settlement of the

present action after its return to the district court.

The Federal Rules of Civil Procedure yee, with

exceptions not important here, that they shall “govern the

procedure in the United States district courts in suits of a

civil nature... .” Fed. R. Civ. P. 1 (emphasis added).

Although Con s unquestionably has the power to supersede

any federal rule either in its entirety or in particular types of

civil actions, we think that the proper rule of construction is

that the Congressional intent to repeal a federal rule must be

clearly expressed before the courts will find such a repeal. See

United States v. Gustin-Bacon Division, Certainseed Products

Corp., 426 F.2d 539, 542 (10th Cir.), cert. denied, 400 U.S. 832

(1970). We think neither the language of the Magnuson-Moss

Act nor its legislative history clearly manifests Congress’

intent to supersede Rule 23(e).

(Footnote continued on following page)

_— =

amended to eliminate the spurious class action. We do

not think that it follows, however, that the trial court

has the power under Rule 23 to dismiss with prejudice

the Magnuson-Moss claims of those subclass members

who refuse to accept the settlement package. As to them,

the “settlement” is not a settlement; it is merely an offer

to settle with a penalty, the dismissal of their federal

50 continued

The Act itself refers to Rule 23 twice. In both cases

however, it merely provides that in class actions maintained

in the federal courts, Rule 23 will govern whether the named

laintiff is a ps r party to represent the class. 15 U.S.C.

g 2310(aX3), 310). he explicit mention of the applicability

of Rule 23 bolsters our conclusion that Rule 23(e) is applicable

to class actions maintained under the Act. We do not find the

negative pregnant that the Congressional sponsors find. Nor

do the Act’s provisions encouraging informal dispute resolu-

tion necessarily preclude the later settlement of a class action

without individual consent by each class member. Indeed, it

would be unreasonable to construe an act whose purpose is to

encourage settlement to preclude settlement as a practical

matter after a class action is commenced.

The legislative history of the Act also fails to evince a

Congressional desire to prohibit class action settlements

without the consent of every class member. That history

— suggests that Congress has precisely the opposite

intention.

Generally speaking, with specific exceptions set forth in

the bill, the procedures are to utilize Rule 23 of the

Federal Rules of Civil Procedure. For instance, in

negotiating the use of any complying informal dispute

settlement procedure or any other settlement pros ure,

the representative party would negotiate on behalf of the

100 named plaintiffs and any other class members.

120 Cong. Rec. 40712 (1974) (remarks of Sen. Moss). The

legislative history does indicate some dissatisfaction with the

Supreme Court’s decision in Evsen v. Carlisle & Jacquelin, 417

U.S. 156 (1974), and perhaps indicates Congress’ intention to

make Rule 23(cX2) inapplicable in some class actions main-

tained under the Magnuson-Moss Act. See H.R. Rep. No. 93-

1107, 93d Cong., 2d Sess., reprinted in lhl .S. Code

Cong. & Ad. News 7702, 7724. No issue about the need for

notice, however, has been raised in this appeal so we need not

decide this question. We decide simply that the Magnuson-

Moss Act does not alter the general rule that the trial court

may approve a class action settlement without the consent of

every member of the class.

—48—

claims, if they do not accept. We decline to put every

subclass member to such an unfair choice.

This court on two occasions has noted that the essence

of a settlement is a bilateral exchange. “The inherent

nature of a compromise is to give up certain — or

benefits in return for others.” Me ld v. Chicago

Milwaukee Corp., 565 F.2d 416, 429 (7th Cir. 1977). “A

settlement by its very nature is an agreement where

both sides gain as well as lose something.” Patterson v.

Stovall, 528 F.2d 108, 115 (7th Cir. 1976). By the terms

of the order of the trial court, subclass members who do

not sign the release give up their Magnuson-Moss claims

and the opportunity to be represented in the class action

in return for nothing.®' The right to pursue state

remedies is not a benefit, because, as discussed above,

the class members possessed state causes of action

against GM independently of the federal litigation and

the federal court is without power to extinguish those

state-created remedies. GM gains the dismissal of each

subclass member’s federal claim, but surrenders nothing

in return.

The federal claims of individual class members cannot

be extinguished with neither adequate consideration in

return nor a hearing on the merits of their claims. The

dismissal of nonconsenting subclass members’ claims

would serve solely to benefit GM or those subclass

members who accept the settlement. Reconciling such a

“settlement” with notions of fair play and justice is

impossible. To permit the trial court to exercise its

power to approve class action settlements in this manner

would contravene the Rules Enabling Act, 28 U.S.C.

§ 2072, by abridging the substantive rights of those who

did not accept the settlement offer.

51 The form of settlement in the case at bar is quite different

than a settlement in which the defendant’s liability is

stipulated and class members must make claims against the

settlement fund. In the latter case, the cause of action of a

class member who fails to file a claim is extinguished by the

settlement, and his right to a recovery is lost because he

sleeps on his rights. In this case, the cause of action of a

subclass member is extinguished and his right to a recovery is

lost because he stands on his rights under state law.

ee At CRB Ah ORLA IAEA B REED L OE matin a a REE “

ee

—49—

_Our objection to the form of settlement in this case i

similar to the Second Circuit’s objection to “fluid es

recovery.” See Eisen v. Carlisle & Jacquelin, 479 F.2d

1005 — Cir. 1973), vacated and remanded on other

grounds, 417 U.S. 156 (1974); Van Gemert v. Boeing Co.,

553 F.2d 812 (2d Cir. 1977). See also In re Hotel Charges,

500 F.2d 86 (9th Cir. 1974). In Eisen the Second

Circuit’s rejection of the use of fluid class recovery

rested at least in part on the court’s concern that that

form of recovery would drastically increase the class

action defendant’s substantive liability. Cf. Beecher v.

Able, 575 F.2d 1011, 1016 n.3 (2d Cir. 1978) (defendant

may agree to a settlement which provides for fluid class

recovery). In this the converse situation, the form of

settlement drastically reduces, in fact extinguishes, the

subclass member’s substantive cause of aciiun under the

Magnuson-Moss Act.®? We hold the trial court’s approval

of the form of settlement here was ei rat: 4 i the

phased pies ge Hp gprs with the trial court’s

ibili act as the protector i

absentee class members. ‘ saa tian

We cannot hold that the dismissal of the federal

claims of those who refuse to accept the settlement offer

was insignificant because it merely closed one of the two

avenues of recovery against GM. Relegating the non-

consenting subclass member to his state remedies

severely reduces his chances of obtaining an adequate

recovery on his claim.

The nonconsenting subclass member loses the advan-

tages and economies of having his interest represented

in the class action. This tends to defeat the purpose of

the class action device to vindicate the interests of the

victims of mass production wrongs. “Generally, unless

the anticipated recovery exceeds the sum of the measure

of the injury and the cost of litigation, multiplied by the

probability of a successful decision, the aggrieved person

will not seek to vindicate his rights.” Note, Judicial

Prerequisites to Class Actions in Illinois: Policy, Prac-

62 Although we note the similarity of our reasoning with that

of the Eisen opinion, we express no opinion on whether the

fluid class recovery technique itself is inconsistent with the

Rules Enabling Act.

=

tice, and the Need for Legislative Reform, 1976 U. Ill.

L.F. 1159, 1167. The letters of those subclass members

who objected to the settlement proposal indicate the

illusory value of the right to pursue their claims

individually:

I will go along with the majority. I can’t afford to

spend any money on a personal law suit.

x * * *

Reguardless [sic] of the decision of the Court, I

will accept it, because I cant [sic] whip a giant like

General Motors, but you do have the powers of your

Judgeship and your Court to set things stright [sz]

as they should be.

This is not to be accepted as notice of withdrawal

of Class or Subclass membership.

These letters also refute GM’s argument that we can

countenance the dismissal of the Magnuson-Moss claim

of a nonconsenting subclass member because he was

aware of the settlement’s terms at the time he made his

election to remain in or opt-out of the subclass. The

opportunity to opt-out was not a very realistic one.

urthermore, we fail to see that a subclass member's

knowledge that he may be treated unfairly excuses

committing the injustice.

Even if the subclass member does pursue his state

remedies, he is still prejudiced by the dismissal of his

Magnuson-Moss claim. “From a consumer protection

point of view, the Warranty Act is clearly preferable to

the Uniform Commercial Code, which is difficult to

apply to consumer sales transactions and is full of

pitfalls for consumers seeking recovery for defective

roducts.” Smith, The Magnuson-Moss Warranty Act:

urning the Tables on Caveat Emptor, 13 Cal. W.L. Rev.

391, 429 (1977). In addition to providing a more certain

path to recovery, the Magnuson-Moss Act provides the

consumer with a more adequate remedy. It provides

that the successful plaintiff may also recover the costs of

litigation (subject to the court’s discretion not to award

attorneys’ fees). 15 U.S.C. a dX2). Thus, the dismis-

sal of the subclass member’s Magnuson-Moss_ claim,

leaving him to pursue his state remedies individually,

=

reduces both the probability that the consumer will

pursue those remedies and, if he does, the probability

that his remedy will be adequate.**

GM maintains that we should approve the settlement

because it has the “overwhelming” support of the

settlement subclass members. GM argues that because

only fifteen subclass members or .03% of the subclass

opted out of the action or objected to the settlement after

notification of its terms, 99.97% of the subclass members

support the settlement. Although the support of class

members is one factor which should be considered in

determining the fairness of a settlement, see Manual for

Complex Litigation § 1.46 at 56, we are not as willing as

GM to infer support from silence.

When a court evaluates the settlement of a class

action brought on behalf of individual shareholders

or consumers, it should be reluctant to rely heavily

on the lack of opposition by alleged class members.

Such parties typically do not have the time, money

or knowledge to ops. sont their interests by

presenting evidence or advancing arguments object-

ing to the settlement.

Factors Considered in Determining the Fairness of a

Settlement, 68 Nw. U.L. Rev. 1146, 1153 (1974). Accord,

Developments in the Law—Class Actions, 89 Harv. L.

Rev. 1318, 1567-68 (1976); cf. Simon, Class Actions—

Useful Tool or Engine of Destruction, 55 F.R.D. 375, 377-

79 (1973) (discussing the tendency of class members not

58 The dismissal of the subclass members’ claims pursuant to

the unusual form of settlement here would also tend to

undermine the purpose of the Magnuson-Moss Act. As to

nonconsenting subclass members, the purpose of the Act to

provers a more certain remedy than is provided under state

aw would be totally defeated. We think that the settlement

provides a unique example of how class action settlements

may tend to defeat, rather than promote, the policies and

“i of the laws sought to be enforced. See generally

al, The Class Action as an Antitrust Enforcement Device:

The Chicago Experience (Part II), 1976 A.B. Foundation

Research J. 1273.

to respond to court communications). Acquiescence to a

bad deal is something quite different than affirmative

support. In any event, even if a majority of the subclass

did favor the settlement, we do not believe that the

preferences of the majority can justify the substantial

injustice to the individual rights of the minority that the

form of settlement proposed here would work.

VI. Directions on Remand

In response to a question from the bench at oral

wank Gat represented to the court that even if the

settlement of the federal class action is not effectuated,

GM may still seek to extend its offer to individual

members of the class. Local Rule 22 appears to require

5% Because the bulk of the class consists of individual

consumers, this case is unlike State of West , v. Chas.

izer & Co., 314 F. Supp. 710, 743 (S.D.N.Y. 1970), aff'd, 440

fod 1079 (2d Cir.), cert. denied, 404 U.S. 871 (1971), in which

the court stated that support by class members was entitled to

“great weight.” Many of the class members in

cag were |

large public or private institutions with large stakes in the

iti : , they could be expected to come forward to

sede Wes see . The Pfizer settlement, however, may

not have been in the best interest of those individual

consumers represented in the action. See In re Coordinated

Pretrial Proceedings in Antibiotic Antitrust Actions, 410 F.

Supp. 706 (D. Minn. — ) fapprovin Bice omed og

i nsumers su ntially hig ) :

poem Wolfram, The Antibiotics Class Actions, 1976 A.B.

oundation Research J. 251.

55 GM’s brief indicates that only 26 individuals wrote to the

trial court to express their approval of the settlement.

8% Indeed, the agreement between GM and the Attorneys

General may obligate GM to extend the offer. Paragraph 11 of

the agreement provides:

while failure by [the district] court to allow General

Motors to make such offer to such offerees shall relieve

General Motors of the obligation under this Agreement to

make such offer, failure by such court to approve settle-

ment of such action . . . shall not relieve General Motors

of such obligation if the court has nevertheless allowed

General Motors to make such offer in exchange for a

Release... .

=— =

the trial court’s approval of any such communication.*’

The question thus presented is whether the trial court

can approve the communication of the offer, despite our

reversal of the court’s order approving the settlement.

‘7 Local Rule 22 of the Northern District. of Illinois, cap-

— “For Prevention of Potential Abuse of Class Actions,”

provides:

In every potential and actual class action under Rule 23,

FR Civ P, all parties thereto and their counsel are hereby

forbidden, directly or indirectly, orally or in writing, to

communicate concerning such action with any potential or

actual class member not a formal party to the action

without the consent of and approval of the communication

by order of the Court. Any such proposed communication

shall be presented to the Court in writing with a designa-

tion of or description of all addressees and with a motion

and —— order for prior approval by the Court of the

pro . communication and proposed addressees. The

communications forbidden by this rule, include, but are

not limited to, (a) solicitation directly or indirectly of legal

representation of potential and actual class members who

are not formal parties to the class action; (b) solicitation of

fees and expenses and a ments to pay fees and ex-

penses, from potential and actual class members who are

not formal parties to the class action; (c) solicitation by

formal parties to the class action of requests by class

members to - out in class actions under subparagraph

(bX3) of Rule 23, FR Civ P; and (d) communications from

counsel or a party which may tend to misrepresent the

status, purposes and effects of the action, and of actual or

potential Court orders therein, which may create im-

pressions tending, without cause, to reflect adversely on

any party, any counsel, the Court, or the administration of

justice. The obligations and prohibitions of this rule are

not exclusive. All other ethical, legal and equitable

obligations are unaffected by this rule.

This rule does not forbid (1) communications between an

attorney and his client or a prospective client, who has on

the initiative of the client or prospective client consulted

with, employed or proposed to employ the attorney, or (2)

communications occurring in the regular course o

business or in the ging oy ee of the duties of a public of-

fice or agency (such as the Attorney General) which do not

have the effect of soliciting representation by counsel, or

misrepresenting the status, purposes or effect of the action

and orders therein.

(Footnote continued on following page)

=

We think that the trial court can. GM’s offer to settle,

if accepted by individual class members, would not

amount to a settlement of the class action itself.

Individual class members would be free to reject it and

continue to have their interests represented in the

federal class action. Thus, the communication falls

outside the language and the purpose of Rule 23(e).5* See

57 continued

The rule was adopted in accordance with the Manual’s

recommendation for preventing unauthorized communications

with class members, see Manual for Complex Litigation

§ 1.41, and follows almost verbatim the local rule contained in

the Manual’s appendix. See id., Appendix § 1.41. (Suggested

Rule No. 9 See also Dole, The Se t of Class Actions for

Damages, 71 Colum. L. Rev. 971, 993-97 (1971).

Questions concerning the district court’s authority to

romulgate the rule pursuant to Fed. R. Civ. P. 83 have not

been raised by the parties and we do not consider them here.

See ally Manual for Complex ag or § 1.41 (4th ed.

1977 & Cum. Supp. 1978). In any event, Rule 23(d), see Weight

Watchers, Inc. v. —_ atchers International, Inc., 455 F.2d

770, 775 (2d Cir. 197 1 the «

trol the conduct of the litigation before it, see Vernon J.

Rockler & Co. v. Minneapolis Shareholders Co., 425 F. Supp.

145, 150 (D. Minn. 1977), provide additional sources for the

district court’s power to control this particular communication

with class members.

58 This case does not Bi) the question, and we need not

), and the court’s inherent power to con-

decide, whether Rule 23(e) would applicable if so many

class members accepted GM’s offer that the class action could

no longer be prosecuted as a class action. Compare American

Finance System Inc. v. Harlow, 65 F.R.D, 572, 576-77 (D. Md.

1974), with Vernon J. Rockler & Co. v. Minneapolis

Shareholders Co., 425 F. Supp. 145, 150 (D. Minn. 1977).

Predicting the number of class members who might accept

GM’s offer at this time is 2 speculative, but even if

enough named plaintiffs accept the offer to reduce the

number of named plaintiffs below the jurisdictional pre-

requisite, see 15 U.S.C. § 2310(dX3) & note 2 ns hs the trial

aed ad ggeone to decide the class action would remain un-

affected. The general rule is that the jurisdiction of the

federal court is determined at the time of the filing of the

complaint. See Mullen v. Torrance, 22 U.S. (9 Wheat.) 537, 539

1824) (diversity not defeated when pa subsequently

mes a citizen of the same state as his opponent. “It is

quite clear, that jurisdiction of the court depends upon the

(Footnote continued on following page)

65

Weight Watchers, Inc. v. Weight Watchers International

Inc, 455 F.2d 770 (2d Cir. 1972); Rodgers v. United

i ¢ ee ee

s of things at the time of the action brought, and th

after vesting, it cannot be ousted by subse uent events.”); St

Paul Mercury Indemnity Co. v. Red Cab Co., 303 U.S. 283

(1938) (court is not ousted of jurisdiction if plaintiff reduces

claim to less than jurisdictional amount subsequent to

removal from state court); cf. Rosado v. Wyman, 397 U.S. 397,

402-05 (1970) (federal court may decide pendent claim even

after claim which provided the basis for jurisdiction becomes

moot). We see no reason why the general rule should be

changed under the Magnuson-Moss Act, particularly when

Congress intended that section 110d) be “construed

reasonably to authorize the maintenance of a class action.”

faa as No. 93-1107, 93d Cong., 2d Sess., reprinted in

. Code Cong. & Ad. News 7702, 7724. The class

action can in no sense be regarded as “trivial or insignificant”

merely because some of the named plaintiffs have accepted

the benefits which the class action has brought forth. Thus, a

reduction in the number of named plaintiffs would not

preclude the trial court from proceeding to the merits of the

class’ Magnuson-Moss claims.

Similarly, even if nearly all the offerees accepted GM’s

settlement offer—a rather unlikely possibility since the

offerees number approximatel 70,000- those who rejected

the offer would not be denied the benefit of class adjudication

of their claims in federal court. Their claims could be ad-

judicated along with those of the 66,000 post-April 10, 1977,

class members to whom GM will not extend the offer.

Therefore, the class will not be decertified for lack of the

numerosity required by Fed. R. Civ. P. 23(aX1). See Rodgers

Core States Steel Corp., 541 F.2d 365, 370 & n.11 (8d Cir.

°° The court in Weight Watchers expressly reserved the

recise question that we decide here. See 455 F.2d 773 n.1. In

eight Watchers the appellant sought review of an order of

the trial court permitting communication between the defen-

dant and individual putative class members. Unlike the pres-

ent case, the _saamagor Rega had not yet been certified to

proceed as a class action. Although the Second Circuit dis-

missed the appeal from the order for want of appellate

urisdiction, accord, Rodgers v. United States Steel Corp., 541

.2d 365 (3d Cir. 1976), its reasoning is plainly applicable to

the present case: “[W]e are unable to perceive any legal theory

that would endow a plaintiff ... with a right to prevent

negotiation of settlements between the defendant and other

potential members of the class who are of a mind to do this; it

is only the settlement of the class action itself without court

approval that F.R.Civ.P. 23(e) prohibits.” 455 F.2d at 773.

—66—

States Steel Corp., 70 F.R.D. 639 (W.D. Pa.), appeal

dismissed, 541 F.2d 1365 (3d Cir. 1976); Dickerson v.

United States Steel Corp., 11 Empl. Prac. Dec. 110,848

(E.D. Pa. a Vernon J. Rockler & Co. v. Minneapolis

Shareholders Co., 425 F. Supp. 145 (D. Minn. 1977); 7A

C. Wright & A. Miller, Federal Practice and Procedure

1797 at 238-39 (1972). But see In re International

ouse of Pancakes Franchise Litigation, 1972 Trade Cas.

1 73,864 (W.D. Mo. 1972); Developments in the Law—

Class Actions, 89 Harv. L. Rev. 1318, 1548 n.66 (1976).

Rule 23(e) requires judicial approval of class action

settlements to guard against possible ineffective repre-

sentation of absentees’ interests by the representative

parties. This danger does not inhere in offers to settle

with individual class members, which the class mem-

bers are free to accept or reject. Accordingly, a proposed

offer to settle with individual class members requires a

lesser degree of judicial scrutiny than a pro

settlement of a class action.

The Manual for Complex Litigation provides no

standards for judicial approval of communications with

individual class members, but we think that the degree

of judicial review should be concomitant with the

potential for abuse that such communications create.

The dangers that the offer to settle individual claims

would create are the possille eromege a I of class

members about the strength and extent of their claims

and the alternatives for obtaning satisfaction of those

claims. Thus, an offer to settle should contain sufficient

information to enable a class member to determine (1)

whether to accept the offer to settle, (2) the effects of

settling, and (3) the available avenues for pursuing his

claim if he does not settle. In contrast to judicial

examination of a proposed class action settlement which

entails consideration of the fairness of the settlement

itself, judicial examination of the offer to settle individ-

ual claims largely entails only consideration of the

—~ =

accuracy and completeness of the disclosure.® See, e.g.

Vernon J. Rockler & Co. v. Minneapolis Shareholders Co.,

425 F. Supp. 145 (D. Minn. 1974) (tender offer which

met with preliminary approval of SEC contained

sufficient information to allow shareholders-potential

class members to make an informed and intelligent

decision); American Finance System Inc. v. Harlow, 65

F.R.D. 572, 576 (D. Md. 1974) (permitting the defendant

to send only “a neutrally worded notice of settlement

containing no more than the terms of the proposed

compromise, the position of both parties and a copy” of

the court’s order).*! Whether the offer to settle should

6° This is not to say that the amount of the proposed con-

sideration for the settlement is entirely irrelevant. An offer to

settle which offers only nominal consideration in return may

amount to little more than a request that the class members

opt-out of the class. See Manual for Complex Litigation § 1.41

at 27 (condemning unauthorized solicitations to opt-out).

Solicitations to opt-out tend to reduce the effectiveness of

(bX3) class actions for no legitimate reason. Offers to settle,

however, both provide redress to individual class members

and reduce the burden on the courts of trying massive class

suits. Determining the difference between the two kinds of

communications necessarily requires some judicial examina-

tion of the amount of consideration offered by the defendant.

Moreover, the amount offered may be so unrealistically low

that the consideration itself tends to mislead class members

about the strength and extent of their claims. Thus the trial

court should examine the amount tendered in settlement

before approving the offer to settle. Yet, because each class

member may judge for himself whether the amount offered is

acceptable, the court need not determine that the amount is

“fair, reasonable and adequate.” The court need only find that

the proposed exchange provides each individual class

member with a meaningful opportunity to obtain satisfaction

of his claim. See Rodgers v. United States Steel Corp., 70

F.R.D. 639, 644 (W.D. Pa.), appeal dismissed, 541 F.2d 365

(3d Cir. 1976).

61 See also Chrapliwy v. Uniroyal, Inc., 71 F.R.D. 461, 464

(N.D. Ind. 1976) (“although the class action itself may not be

voluntarily dismissed without Court approval and scrutiny,

an individual claim in a 23(bX3) action may be settled and

dismissed at the class member’s own initiative. . . . Because

the ability to settle an individual class member’s claim could

be misused, the Court must be careful to exercise control over

(Footnote continued on following page)

~~

contain a statement by the plaintiff-objectors of their

opinion of the adequacy of the settlement package in

order to make the communication a full and complete

disclosure is a matter left to the trial court’s discretion.

We do believe, however, that the trial court should insist

that the notice state that the court’s permission to

communicate the offer does not indicate any opinion or

finding by the trial court that the settlement package is

fair or adequate consideration for the release of a

subclass member’s claim. See American Finance System

Inc. v. Harlow, 65 F.R.D. at 576 n.65.

We do not intend to recommend individual settlements

as preferable to a fair settlement of the action for all

class members. Given the present ture of this

litigation, however, we recommend that the district

court consider the advisability of permitting the com-

munication if GM decides to extend its offer to individual

members of the class. This procedure would provide

those class members who wish to settle the benefit of the

settlement package already negotiated, minimize fur-

ther litigation and discovery on issues collateral to the

merits of the Magnuson-Moss claim,® and permit those

who desire to prosecute their claims to do so. Our

discussion here is not intended to resolve all questions

61 continued

the communication of all parties to the suit so that undue in-

fluence is gd Dole, The Settlement of Class Actions for

Damages, 71 Colum. L. Rev. 971, 995-97 (1971); Deve

in the Law—Class Actions, 89 Harv. L. Rev. 1318, 1549-50,

1601-04 (1976).

62 Specifically, because a class action defendant may com-

municate an offer to settle individual claims without the

agreement or consent of the named plaintiffs or their counsel,

the court need not permit discovery into the conduct of the

ee negotiations before approving the communication

of the offer.

=

raised by GM’s offer; these matters are best left to the

district court for determination in the first instance.®

Vii. Conclusion

Our reversal of the district court’s approval of the

proposed settlement is a decision that we reach with

considerable reluctance. We do not seek to discourage a

full settlement of this litigation. More than a year has

passed since the Illinois Attorney General presented the

settlement agreement to the district court for its

consideration. Most likely little has been done since then,

aside from some additional discovery, to advance toward

a trial on the merits. In the meantime, members of the

settlement subclass must be wondering whatever be-

came of the $200 and the mechanical insurance policy

each had been promised. Our reluctance to unscramble on

review what has been accomplished in the trial court,

however, must yield when what has been done not only

creates a substantial doubt about whether the interests

of the class were ade age represented during the

settlement negotiations, but also unjustifiably Fy so

the rights of individual members of the class. We believe

that approval of what has been done here would

establish a precedent inconsistent with the proper

functioning of the class action device.

We do not question in the least the good faith of the

group of state Attorneys General who negotiated the

settlement. We are well aware of the increasingly

important role that state Attorneys General have taken

68 In particular, we leave to the district court the difficult

uestion of the entitlement of the class counsel to attorneys’

ees for their part in encouraging GM to extend the offer. If

the district court decides attorneys’ fees are appropriate, it

must then grapple with the even more difficult questions of

the allocation of fees among the attorneys and the allocation of

the burden of the fees between GM and the class or among

class members themselves. See generally Dole, The Se

of Class Actions for Damages, 71 Colum. L. Rev. 971, 997-1000

1971); Developments in the Law—Class Actions, 89 Harv. L.

v. 1318, 1547 n.59 (1976).

—60—

in protecting consumers’ rights.“ We are also acutely

aware of the difficulties which confront litigants at-

tempting to settle consumer class actions based on the

Magnuson-Moss Act. The Act by adopting in substantial

art, but not preempting state law remedies provides a

egal environment conducive to competing state and

federal court actions. The myriad lawsuits make settle-

ment desirable, but simultaneously make achieving an

acceptable settlement extraordinarily difficult for all

concerned. We hold merely that the method of reaching

a settlement that GM and the Attorneys General chose

warranted greater scrutiny than the trial court permit-

ted and that the form of effecting the settlement

permitted by the trial court was unauthorized. Accord-

ingly, the order of the district court 1s

REVERSED. |

A true Copy:

Teste:

Clerk of the United States Court of

Appeals for the Seventh Circuit

See, e.g., Mooney, The Attorney General as Counsel for the

Consumer: The Or E e, 54 Ore. L. Rev. 117 (1975);

T &S els, The lopment of Consumer Protection

Actwities im the Ohio A j General’s Office, 37 Ohio St.

L.J. 581 (1976); Note, The Role of the Michigan Attorney

General in on es and Environmental Protection, 72 Mich.

L. Rev. 1030 (1974); Note; Consumer Protection the State

Attorneys General: A Time for Renewal, 49 Notre Dame Law.

410 (1973). See also 15 U.S.C. §§ 15a-15h.

iin

IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF ILLINOIS

EASTERN DIVISION

* * (Caption — MDL Docket No. 308) * *

ORDER DATED 7/17/78

Enter Findings of Fact and Conclusions of Law Regard-

ing Subclass Settlement—DRAFT

Pursuant to Order Approving Subclass Settlement, the

court orders that:

1. The settlement proposed by defendant of the sub-

class claims is determined to be fair and reasonable and is

approved by the court.

2. Defendant General Motors shall, at its expense, send

an approved notice of settlement, together with appropriate

claim form and release, to all subclass members who have

not filed a timely request for exclusion from the subclass,

by first class mail. All parties are given fifteen days to

comment in writing upon the proposed notice of settlement

submitted by General Motors.

3. After mailing of the settlement notice has been com-

pleted, defendant General Motors shall file with the court

an appropriate affidavit of mailing. Thereafter, defendant

shall report to the court the names of those subclass mem-

bers who have accepted the settlement.

4. The action on behalf of subclass members who accept

and receive the settlement shall be and is hereby dismissed

as to defendant General Motors with prejudice.

5. The action on behalf of subclass members who do not

accept the settlement shall be and is hereby dismissed as

to defendant General Motors. Dismissal as to those persons

shall be without prejudice solely to their rights to pursue

such other remedies as may be otherwise available to them.

6. The court retains jurisdiction over the subclass to

supervise implementation of the settlement, and retains

jurisdiction as to the balance of the full class for all pur-

poses for which the class was initially certified —DRAFT

Cause set for pretrial corference on August 4, 1978 at 9:15

a.m.

—62—

IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF ILLINOIS

EASTERN DIVISION

* * (Caption — MDL Docket No. 308) * *

FINDINGS OF FACT AND CONCLUSIONS OF LAW

REGARDING SUBCLASS SETTLEMENT

This class action litigation is brought on behalf of pur-

chasers of 1977 Oldsmobile cars who received such cars

equipped, without their knowledge or consent, with V-8 en-

gines produced by defendant’s Chevrolet Motor Division.

The class has been certified aS to the issue of liability

only under the Magnuson-Moss Warranty Act, 15 US.C.A.

§§2301-12 (1977 Supp.). Subsequently, the court certified

a subclass consisting of class members who entered into

written purchase orders for their Oldsmobiles on or be-

fore April 10, 1977.

The defendant, General Motors Corporation (GM), on

December 19, 1977, tendered a proposed settlement to re-

solve the claims of the subclass members. After allowing

the class representatives time to conduct discovery re-

garding the fairness of the proposed settlement, and after

giving notice to all subclass members, the court conducted

a hearing on objections to the proposed settlement which

commenced on May 1, 1978 and concluded on May 25, 1978.

On the basis of its full consideration of the record be-

fore it, including the post-hearing briefs submitted by the

parties, the court enters the following Findings of Fact

and Conclusions of Law.

FINDINGS OF FACT

Terms of Proposed Settlement

1. The proposed settlement provides that, upon execu-

tion of an appropriate release of claims, GM will pay to

each of the 66,872 members of the subclass the cash sum

of $200. The total cash sum to be paid to the subclass, if

all members accept the settlement, is $13,374,400. (Settle-

ment Agreement, {[6, filed 12/19/77; ‘‘Report on Exclusions

from Class and Subclass’’, filed 5/23/78 (Tr. 1483) )

—

2. Also as part of the settlement, GM will extend to

each subclass member who owns an eligible vehicle a spe-

cial mechanical performance certificate, issued by GM’s

subsidiary, Motors Insurance Corporation (MIC), insur-

ing components of the car’s power train (engine, trans-

mission and drive axle) against mechanical breakdown or

failure for a period of 36,000 miles or 36 months from the

date of original delivery, whichever occurs first. (Settle-

ment Agreement, {[6) The specific coverage and terms of

the proposed insurance are matters of record and are not

in dispute. (DX 49; PX 195)1 The certificate will be non-

cancellable and transferable, meaning that it can be as-

signed to a subsequent purchaser of the vehicle. GM has

represented that otherwise eligible losses incurred prior

to the issuance date of an individual’s certificate will be

reimbursed upon submission of adequate documentation of

the expense incurred. (Tr. 1483-84)

3. The settlement will give each subclass member the

option either to accept the cash payment and insurance

certificate in exchange for a release of all his claims, or

to reject the settlement and pursue such other remedies

as he may feel are available. Thus, subclass members who

desire to pursue, under state law theories, a larger award

than provided for by this settlement, will not be precluded

from doing so.

Support for the Settlement

4. One factor considered by the courts in evaluating

the fairness of a proposed class action settlement is the

degree of support for, as well as opposition to, the settle-

ment. Of the twelve consolidated cases before the court,

the named plaintiffs in seven cases actively support the

settlement, while plaintiffs in three cases objected and

plaintiffs in two cases remained silent. (Tr. 18-20, 1412;

1 All transcript citations are to the record of the fairness hear-

ing unless otherwise indicated. Objectors’ exhibits are designated

‘‘PX”’ and defendant’s exhibits are designated ‘‘DX’’. Page ref-

erences to ‘‘M....’’ are to the MDL production numbers appearing

on multi-page exhibits.

ee

‘‘Notice of Intention to Appear at May 1, 1978, Hearing

and Summary of Objections to Proposed Settlement’’, filed

4/17/78)

5. The response of the subclass members indicates ex-

tensive support for the settlement. Only eleven of the 66,872

subclass members submitted written objections pursuant

to the class notice. (‘‘Preliminary Report by Defendant

GM Regarding Responses to Class Notices’’, filed 5/1/78)

Of these, three appeared to testify. (Shaffer, Tr. 229;

Jasko, Tr. 202; Urfer, Tr. 90) Four other subclass mem-

bers also appeared at the hearing to express objections

to the settlement. (Gordon, Tr. 149; Seltzer, Tr. 170; Perko,

Tr. 299; Schulman, Tr. 322)

6. In addition to the support of the majority of class

representatives and uearly all subclass members, the set-

tlement offer is supported by the attorneys general of

forty-six states. Only the attorneys general of New York,

Towa, Kentucky and Louisiana have not accepted the set-

tlement. (Tr. 1413; Transcript of Proceedings, 12/19/77,

pp. 3-9, 23-26) Of these, the Attorney General of New York

settled with GM on the basis of the May, 1977 offer. (DX

36) If the settlement is approved, GM has agreed to ex-

tend the offer to subclass members in all fifty states. (Block

Ex. 1)

Adequacy of the Proposed Settlement

7. Without prejudging in any way the issues joined

in the lawsuit, the court was concerned during the fair-

ness hearing principally in assessing the comparability

of the Chevrolet-produced engines with the Oldsmobile-

produced engines involved in these proceedings.

8. Three Chevrolet-produced V-8 engines were used in

1977 Oldsmobiles. Two had a displacement of 350 cubic

inches: the LM1 engine equipped with a four-barrel car-

buretor and the L65 engine equipped with a two-barrel

carburetor. The third engine, designated LG3, was a 305

cubic inch displacement engine. (PX 76; DX 9, 11, 37, 38)

—65—

9. In the 1977 model year, Oldsmobile produced V-8

engines with 260, 350, and 400 cubic inch displacements.

(PX 76; DX 38) Thus, the LG3 305 engine is not com-

parable in displacement to any engine produced by Olds-

mobile. (Tr. 1149) In the 1977 model year, Oldsmobile

equipped approximately 20,000 cars with the LG3 305 as

an optional engine. (DX 11) No objection to the settlement

was filed by any purchaser of an Oldsmobile equipped with

the LG3 305 engine.

10. In the absence of any objection relating to the LG3

305 engine and in the absence of any Oldsmobile-produced

counterpart, the settlement appears adequate for those sub-

class members who selected that engine for their cars. The

objecting class representatives adduced no evidence from

which it could be concluded that the settlement is inade-

quate insofar as it relates to those purchasers.

11. Moreover, the engineering evidence presented by

GM showed that the LG3 305 engine passed the same cor-

porate durability test as the other GM engines involved

in this litigation. (Tr. 1149-51) GM’s tests also indicate

that the performance (or acceleration) and fuel economy

of that engine are satisfactory, falling between those of

the 260 Oldsmobile-produced engine and the 350 engines

produced by Oldsmobile and by Chevrolet. (Tr. 1151-52)

On this record, therefore, it can be concluded that the

settlement is fair and adequate with respect to those sub-

class members who received the Chevrolet-produced LG3

engine.

12. Most of the evidence of engineering comparability

presented during the hearing concerned the 350 engines,

especially the LM1 Chevrolet-produced engine and the L34

Oldsmobile-produced engine. To a considerable extent, the

facts are undisputed, although the inferences to be drawn

from those facts are contested. Mindful that it has con-

ducted a fairness hearing and not a trial, the court draws no

final conclusions on this subject, but rather assesses the

record to determine whether the settlement appears ade-

quate in light of the parties’ competing positions regard-

ing the comparability of the two engines.

—~es—

13. The principal engineering expert to testify at the

hearing on behalf of General Motors was a GM employee,

Paul Johnson, an automotive engine expert with consider-

able experience in designing, developing, and testing en-

gines, including the Chevrolet small-block V-8 engine from

which the LM1 350 engine is derived. (Tr. 964-73) He tes-

tified that the L34 and LM1 engines are the same in basic

concept (Tr. 979) and that both were rated at 170 horse-

power as used in 1977 Delta 88’s. (DX 38) Johnson ex-

plained that automotive engineers evaluate and compare

automobile engines on the basis of three criteria: dura-

bility, performance, and fuel economy. (Tr. 981)

14. Through two automobile mechanics, the objectors

identified several dimensional and other physical differ-

ences between the LM1 and L34 engines. Johnson, GM’s

expert, testified that the dimensional and other physical

differences were immaterial to the comparative durability

and performance of the two engines. Certain physical dif-

ferences, he testified, reflected equally acceptable engi-

neering solutions to the same engine design challenges.

(Tr. 1077-1116, 1137-42)

Durability

15. According to the evidence, each type of engine is

subjected to a corporate 200-hour wide-open throttle en-

gine dynamometer test, a strenuous pass-fail test designed

to put more wear and strain on the engine than will be

imposed by a normal driver under normal driving condi-

tions. (Tr. 985-88; DX 13)

16. Both the L34 and LM1 engines passed GM’s 200-

hour durability test. Johnson testified that these results

indicate that the LM1 and L34 engines are comparable in

durability, that the durability of either engine will be satis-

factory to a person operating a car equipped with either

engine, and that the engines will probably outlast the ve-

hicles in which they are installed. (Tr. 988-92, 997; DX

14) The evidence also indicates that both types of engine

passed an over-the-road 50,000-mile durability test as part

of the Environmental Protection Agency’s (EPA) certifi-

cation procedures. (Tr. 995-96)

ait ting ate ag

_— =

17. The objectors introduced Oldsmobile’s reported war-

ranty repair data on the LM1 and L34 engines as .ex-

perienced in 1977 Delta 88 and Omega cars. These data

indicate that between March, 1977, when this litigation was

filed with its attendant publicity, and October, 1977, the

frequency of warranty claims experienced by Oldsmobile

was somewhat higher with the LM1 engine than with the

L34 engine. (PX 141) Oldsmobile’s warranty cost per en-

gine was correspondingly higher on the LM1 engine than

on the L34 engine. (PX 142)

18. No evidence was submitted indicating that the dis-

parity in warranty experience between the two engines re-

flected any difference in the durability or quality of the

two engines. According to Johnson’s testimony, warranty

claims data indicate the correction of problems occurring

in mass production which are made at no cost to the buyers.

Such problems normally are identified early in the life of

the particular car and are not apropos to the question of

durability.

Performance

19. Engine performance is measured as acceleration

potential or maximum performance capability. (Tr. 1002-

03) GM’s test data indicate that the LM1 engine offers

slightly better performance than the L34 engine, although

the difference might not be discernible to an average driv-

er. (DX 15; Tr. 1002-03, 1330) The objectors’ principal

mechanic witness agreed that the LM1 engine offered some-

what better performance. (Tr. 789-91)

20. The slight edge given to the Chevrolet-produced

LM1 engine in the area of performance or acceleration

takes on added significance in view of the marketing evi-

dence offered by the objectors which demonstrated that

an optional 350 cubic inch engine was more likely to be

selected by purchasers who desired higher performance.

(PX 127, p. M5840; PX 143; Tr. 124) To the extent that

subclass members chose an optional 350 engine over the

base or standard engine offered in their 1977 Oldsmobiles

to obtain higher performance, the record indicates that

—68—

the LM1 engine offered equal if not slightly greater per-

formance than the Oldsmobile L34 350 engine. (Tr. 1134-35)

Fuel Economy

21. The 1977 official EPA miles-per-gallon estimates

were 18 mpg and 17 mpg on a combined city/highway basis

for the L34 and LM1, respectively. (PX 169, 170) On the

basis of an assumed price of 70¢ per gallon, the objectors

urged that, over a driving cycle of 105,000 miles, the 1977

EPA-estimated differential would amount to a cost dif-

ferential of approximately $230. (PX 171)

22. GM’s expert testified that EPA mileage estimates

are not based on over-the-road tests, but rather are cal-

culated from measurements of emissions during in-place

dynamometer tests. (Tr. 1009) His opinion was that dif-

ferences of one mile-per-gallon in EPA estimates are not

a reliable indicator of the relative fuel economy of two en-

gines under actual driving conditions. (Tr. 1005; 1047-48)

23. This opinion is supported by other evidence intro-

duced by GM. The EPA itself in a proposed rule has com-

mented that ‘‘the relative ranking in the Guide for a 20

mpg car as compared to a 21 mpg car is not highly sig-

nificant.’ Fed.Reg., Vol. 48, No. 33 (Feb. 16, 1978) (p.

6818) (DX 22) In a separate study, two governmental en-

gineers concluded:

‘‘For a 1 mpg difference in the EPA values between

two vehicles, the probability of rank reversal in use

is about 40% for the whole range of cars for one model

year. In order to achieve a probability of correct rank-

ing in use of 90% for any two vehicles from the whole

population, the difference between the two vehicles

must be about 5 mpg based on the EPA numbers.”’

A Comparison of Fuel Economy Results from EPA

Tests and Actual In-Use Experience 1973-1977 Model

Year Cars, February, 1978, page 23 (DX 23)

24. GM introduced the results of three over-the-road

fuel economy tests involving comparisons of the L34 and

LM1 engines. In one test, conducted on September 22,

i ia

—eo—

1976, Oldsmobile tested a Delta 88 equipped with an L34

engine against a Chevrolet Caprice, of comparable weight,

equipped with an LM1 engine. Based on the test results,

the overall actual fuel economy was computed on a weighted

basis of 16.30 mpg and 16.28 mpg for the L34 and LM1

engines, respectively. (DX 17, 25, 26) Using the objectors’

own measurement, this differential would result in.a cost

differential of only $5.53 between the two engines over a

distance of 105,000 miles. (PX 171) However, when the

September 22, 1976 data (DX 17) are arithmetically aver-

ages, the LM1 surpassed the L34 in fuel economy. (DX 24)

In any event, GM’s expert testified that the mpg differ-

ential was so small that it was beyond the engineer’s abil-

ity to measure it reliably. (Tr. 1018, 1040, 1048)

25. In another GM over-the-road test, involving a Delta

88 equipped with an LM1 and a Delta 88 equipped with

an L34 driven from Lansing, Michigan, to Phoenix, Arizona,

the fuel economy of the two engines was comparable, ac-

cording to Johnson. (Tr. 1022; DX 20) The differential was

computed at 0.45 mpg in favor of the L34 engine (Tr. 1053)

—again, an amount he testified was too small to measure

reliably. (Tr. 1040, 1048) The test reports also indicate

that the L34 engine failed to meet prescribed emission

levels both before and after the test, thus enhancing its

fuel economy. (Tr. 1023-24)

26. As with the other two tests, Johnson testified that

the data from the third over-the-road test demonstrated

the fuel economy of the two engines to be comparable with-

in the ability of the tests to discriminate. (DX 18; Tr.

1019) Based on the totality of fuel economy data available

to him, Johnson’s expert engineering conclusion was that

the two engines offered comparable fuel economy in 1977

Oldsmobiles. (Tr. 1018, 1027, 1040)

27. Also regarding fuel economy, GM notified its deal-

ers of its planned usage of the LM1 engine in some Olds-

mobile models prior to their production and gave its dealers

proper 1977 EPA mpg estimates for that engine. (PX 179,

180; DX 37, 43) GM asked its dealers to hand-correct ex-

—10—

isting merchandising materials to reflect the new data.

(PX 180, p. M4760) It also prepared wall posters for dealer

showrooms and revised its new car catalogs to reflect the

new EPA figures. (PX 180, p. M4760; PX 76, 78) GM’s

evidence that an EPA mileage label bearing the proper

EPA ratings was affixed to each new car equipped with

an LM1 engine was uncontradicted. (Tr. 686; DX 6; PX

40) Hence, steps were taken to supply consumers with

proper EPA estimates for the LM1 engine. (Tr. 73; DX

6; PX 40, 179, 180, 76)

28. This aspect of the case is further complicated by

the characterization of the EPA mpg numbers as ‘‘esti-

mates’’ even by the EPA. (PX 169, 1970, 40; DX 6) Pro-

motional materials introduced by the parties reflect the

caveat to consumers that:

‘‘EPA mileage ratings are estimates and yorr mile-

age may vary according to your own driving habits,

the condition of your car, and the type of equipment

installed.’’ (DX 46)

Some objecting subclass members testified that they were

aware of this caveat at the time of purchase. (See, e.g.,

Tr. 73-74, 338) Moreover, the objectors condueted an over-

the-road comparison from Texas to Illinois between two

Delta 88’s, one equipped with a high-altitude L34 engine

and the other with a low-altitude LM1 engine. (DX 58, 59;

Tr. 1555-59) While the comparison made does not appear

to be a reliable indication of relative fuel economy, the

fuel economy achieved by the LM1 engine in the objectors’

own demonstration actually exceeded the combined city/

highway EPA estimate for both the LM1 and L34 engines.

(Tr. 1546, 848; PX 169, 226, 227)

29. With respect to the L65 350 engine, Johnson tes-

tified that it is similar to the LM1 engine and has the

same short block. (Tr. 1146) Because the L65 engine de-

velops somewhat less horsepower with a two-barrel car-

buretor, he concluded that its durability would be at least

equal to or greater than that of the LM1 engine. (Tr.

1147) Johnson also testified that the performance or ac-

celeration of the L65 would be less than that of the L34

a.

engine by about the same amount as the LM1’s perform-

ance exceeds that of the L34. (Tr. 1147) According to

Johnson, the fuel economy offered by the L65 engine was

comparable to that offered by the LM1 and L3é4 engines.

(Tr. 1148) No significant evidence contradicting these con-

clusions was offered by the objectors insofar as the L65

engine is concerned.

30. For purposes of evaluating the proposed settlement,

the evidence regarding the comparability of the LM1, L65,

and L34 engines, even though contested at points, persuades

the court that the settlement falls well within the para-

meters of reasonableness and fairness. However, the ob-

jectors have raised other objections to the settlement which

the court also has considered in reaching its conclusion. The

principal remaining objections are discussed in the balance

of these findings.

Transmission Usages

31. The objectors contended at the hearing that Olds-

mobile used a different and less expensive transmission

with the LM1 engine in Delta 88 coupes and

This text is long and has been trimmed here. Open the source document for the complete record.