Appendix — Oswald v. General Motors Corp.

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IN THE

UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF ILLINOIS

EASTERN DIVISION

In re

GENERAL MOTORS

CORPORATION MDL Docket No. 308

ENGINE LITIGATION

MEMORANDUM OPINION AND ORDER

Certain attorneys of the plaintiffs’ Executive Committee

have raised objection to this court’s position on the burden of

proof regarding the fairness hearing to be held concerning the

proposed settlement proffered by defendant General Motors

(hereinafter ““GM’’). These attorneys have also objected to the

limitations on the scope of discovery set by this court, whereby

the court has precluded inquiry into the settlement negotiations

process between GM and the attorneys general who are parties

to the proposed settlement agreement. These objections were

voiced in a letter sent to the court by attorney Lawrence Walner

pursuant to the court’s direction at the last status hearing. The

substance of the letter has been treated by the court in motion

form and will be filed for the record nunc pro tunc January 3,

1978, the date it was received. Defendant GM has responded

to the plaintiffs’ request for discovery into the negotiation

process by memorandum dated January 10, 1978.

The first issue which the court addresses is the plaintiffs

mistaken belief that the court has shifted the burden of proof to

the opponents of the proposed settlement. This contention

ignores the distinction between burden of proof and the burden

of going forward with the evidence. This court stated at the

pretrial conference on December 19, 1977, that the terms of the

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settlement made a prima facie showing of fairness. This

statement was not intended to shift the burden of proof from

the proponents of the settlement. The court was and is merely

trying to obviate the need for GM to make a lengthy record

showing the fairness of the settlement if the opponents of the

settlement have no material objections. GM will be required to

establish, on the record, a basis for the proposition that the

settlement is fair. Because the terms of the settlement appear to

be reasonable to the court, in the interests of judicial economy

we think this should be done in rebuttal to arguments made

against the fairness of the settlement. The burden of showing

the fairness of the settlement, however, remains with the

proponents of that settlement.

Certain plaintiffs’ counsel have also objected to this court's

determination that the process of the negotiation of the pro-

posed settlement between GM and the various attorneys gener-

al who signed the agreement is not open to discovery. Plain-

tiffs’ memorandum has cited a number of cases dealing general-

ly with disclosure of relevant materials in discovery and with an

objecting party’s opportunity to take reasonable discovery in

order to formulate his objections.

Bearing in mind the broad scope of discovery under the

federal rules, we still do not find the negotiation process of the

settlement to be relevani to the issue to be presented at the

fairness hearing. As was stated in Liebman v. J. W. Peterson

Coal & Oil Co., 73 F.R.D. 531 (N.D. Ill. 1973): “[{T]he

primary criterion for the court in evaluating the fairness and

adequacy of a proposal is an informed estimate of the probabil-

ities of both liability and damages.” Jd. at 535.

The Manual for Complex Litigation at pages 66 and 67

sets forth various considerations which may guide a court in the

ultimate determination of whether a settlement is fair. How-

ever, we fail to see how discovery into the negotiation process

itself could add anything to the factors which this court will

consider. To be sure, the fact that the proposed settlement was

Od OO EO eee

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negotiated, at least on one side, by persons who for the most

part are not counsel of record in this action, is a factor to be

considered. See Manual for Complex Litigation, pp. 63 and 64.

At the same time, this court must recognize that these same

negotiating parties, because of the potential overlap of class

actions, were representing potential class members in the case

at bar, albeit that representation was in the conduct of other

cases seeking similar relief.

As stated in the Manual for Complex Litigation, ‘In order

to approve a settlement, the court must find that the proposed

settlement is fair, reasonable, and adequate with respect to all

classes and subclasses involved.” /d. at 65. This case has been

prosecuted by no less than ten attorneys for the plaintiff class.

Who better than those counsel should know the ultimate

strengths and weaknesses of their case on both liability and

damages? And who better than defendant GM and the plain-

tiffs herein should have the discoverable material necessary to

show liability and damages? Just as we find no relevancy to the

settlement process carried out between GM and the various

attorneys general, so do we see little, if any, relevancy in having

attorneys general, who are signatories to the agreement, testi-

fying at the fairness hearing.

Should plaintiffs be able to demonstrate to the court some

concrete reason for the relevancy of the negotiation process, the

court would reconsider its ruling. At the present time, however,

the court finds the negotiation process to be irrelevant to the

considerations of the fairness hearing and, therefore, outside

the scope of discovery.

ENTER:

/s/ FRANK J. MCGARR

UNITED STATES DISTRICT JUDGE

DATED: February 8, 1978

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IN THE

UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF ILLINOIS

: EASTERN DIVISION

In re

GENERAL MOTORS

CORPORATION MDL Docket No. 308

ENGINE INTERCHANGE

LITIGATION

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 engines

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 U.S.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 before April 10, 1977.

The defendant, General Motors Corporation (GM), on

December 19, 1977, tendered a proposed settlement to resolve

the claims of the subclass members. After allowing the class

representatives time to conduct discovery regarding 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 I, 1978

and concluded on May 25, 1978.

On the basis of its full consideration of the record before it,

including the post-hearing briefs submitted by the parties, the

court enters the following Findings of Fact and Conclusions of

Law.

Sa

FINDINGS OF FACT

Terms of Proposed Settlement

1. The proposed settlement provides that, upon execuuion

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. (Setthement Agreement, § 6,

filed 12/19/77; “Report on Exclusions from Class and Sub-

class”, 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 special me-

chanical performance certificate, issued by GM's subsidiary,

Motors Insurance Corporation (MIC), insuring components of

the car’s power train (engine, transmission and drive axle)

against mechanical breakdown or failure for a period of 36,000

miles or 36 months from the date of original delivery, which-

ever occurs first. (Setthement Agreement, 96) The specific

coverage and terms of the proposed insurance are matters of

record and are not in dispute. (DX 49; PX 195)* The

certificate will be noncancellable and transferable, meaning

that it can be assigned 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 certifi-

cate in exchange for a release of all his claims, or to reject the

settlement and pursue such other remedies as he may feel are

* All transcript citations are to the record of the fairness

hearing unless otherwise indicated. Objectors’ exhibits are

designated “PX” and defendant's exhibits are designated

“DX”. Page references to“M_ ™” are to the MDL production

numbers appearing on multi-page exhibits.

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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 settlement. 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; “Notice of Intention to Appear at May l,

1978, Hearing and Summary of Objections to Proposed Settle-

ment”, filed 4/17/78)

5. The response of the subclass members indicates exten-

sive 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 Regard-

ing 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 members also appeared at the hearing

to express objection 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 nearly all subclass members, the settlement

offer is supported by the attorneys general of forty-six states.

Only the attorneys general of New York, Iowa, Kentucky and

Louisiana have not accepted the settlement. (Tr. 1413: Tran-

script of Proceedings, 12/19/77, pp. 3-9, 23-26) Of these, the

Attorney General of New Yerk settled with GM on the basis of

the May, 1977 offer. (DX 36) If the settlement is approved,

GM has agreed to extend the offer to subclass members in all

fifty states. (Block Ex. 1)

Ta

Adequacy of the Proposed Settlement

7. Without prejudging in any way the issues joined in the

lawsuit, the court was concerned during the fairness hearing

principally in assessing the comparability of the Chevrolet-

produced engines with the Oldsmobile-produced engines in-

volved 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 carburetor

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)

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 comparable in

displacement to any engine produced by Oldsmobile. (Tr.

1149) In the 1977 model year, Oldsmobile equipped approxi-

mately 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 subclass

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 inadequate insofar as it

relates to those purchasers.

11. Moreover, the engineering evidence presented by GM

showed that the LG3 305 engine passed the same corporate

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

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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 subclass members who received the Chevrolet-

produced LG3 engine.

12. Most of the evidence of engineering comparability

presented during the hearing concerned the 350 engines, espe-

cially the LMI Chevrolet-produced engine and the L34

Oldsmobile-produced engine. To a considerable extent. the

facts were undispuied, although the inferences to be drawn

from those facts are contested. Mindful that it has conducted a

fairness hearing and not a trial, the court draws no final

conclusions on this subject, but rather assesses the record to

determine wheiher the settlement appears adequate in light of

the parties’ competing positions regarding the comparability of

the two engines.

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 considerable ex-

perience in designing, developing, and testing engines, in-

cluding the Chevrolet small-block V-8 engine from which the

LMI 350 engine is derived. (Tr. 964-73) He testified that the

L34 and LMI engines are the same in basic concept (Tr. 979)

and that both were rated at 170 horsepower as used in 1977

Delta 88's. (DX 38) Johnson explained that automotive

engineers evaluate and compare automobile engines on the

basis of three criteria: durability, performance, and fuel econo-

my. (Tr. 981)

14. Through two automobile mechanics, the objectors

identified several dimensional and other physical differences

between the LMI 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 differences, he testified.

reflected equally acceptable engineering solutions to the same

engine design challenges. (Tr. 1077-1116, 1137-42)

we on

94

Durability

15. According to the evidence, each type of engine is

subjected to a corporate 200-hour wide-open throttle engine

dynamometer test, a strenuous pass-fail test designed to put

more wear and strain on the engine that will be imposed by a

normal driver under normal driving conditions (Tr. 985-88; DX

13)

16. Both the L34 and LMI engines passed GM's 200-hour

durability test. Johnson testified that these results indicate that

the LMI and L34 engines are comparable in durability, that the

durability of either engine will be Satisfactory to a person

operating a car equipped with either engine, and that the

engines will probably outlast the vehicles 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) certification procedures. (Tr. 995-96 )

17. The objectors introduced Oldsmobile’s reported war-

ranty repair data on the LMI and L34 engines as experienced

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 war-

ranty claims experienced by Oldsmobile was somewhat higher

with the LMI engine than with the L34 engine. (PX 141)

Oldsmobile’s warranty cost per engine was correspondingly

higher on the LMI 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 reflected

any difference in the durability or quality of the two engines.

According to Johnson's testimony, warranty claims data in-

dicate 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.

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Performance

19. Engine performance is measured as acceleration

potential or maximum performance capability. (Tr. 1002-03)

GM's test data indicate that the LMI engine offers slightly

better performance than the L34 engine, although the differ-

ence might not be discernible to an average driver. (DX 15; Tr.

1002-03, 1330) The objectors’ principal mechanic witness

agreed that the LMI engine offered somewhat better perform-

»nce. (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 evidence 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 the LMI engine offered equal if not slightly

greater performance 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 LMI, 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 differential of approxi-

mately $230. (PX 171)

22. GM’s expert testified that EPA mileage estimates are

not based on over-the-road tests, but rather are calculated from

measurements of emissions during in-place dynamometer tests.

(Tr. 1009) His opinion was that differences of one mile-per-

gallon in EPA estimates are not a reliable indicator of the

relative fuel economy of two engines under actual driving

conditions. (Tr. 1005; 1047-48)

_

23. This opinion is supported by other evidence in-

troduced by GM. The EPA itself in a proposed rule has

commented that “the relative ranking in the Guide for a 20

mpg car as compared to a 21 mpg car is not highly significant.”

Fed. Reg., Vol. 43, No. 33 (Feb. 16, 1978) (p. 6818) (DX 22)

In a separate study, two governmental engineers 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

ranking 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 LMI

engines. In one test, conducted on September 22, 1976, Olds-

mobile tested a Delta 88 equipped with an L34 engine against a

Chevrolet Caprice, of comparable weight, equipped with an

LMI 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

averaged, the LMI surpasses the L34 in fuel economy. (DX

24) In any event, GM’s expert testified that the mpg differential

was so small that it was beyond the engineer’s ability to

measure it reliably. (Tr. 1018, 1040, 1048)

25. In another GM over-the-road test, involving a Delta

88 equipped with an LMI and a Delta 88 equipped with an L34

driven from Lansing, Michigan, to Phoenix, Arizona, the fuel

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economy of the two engines was comparable, according 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 within 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 com-

parable fuel economy in 1977 Oldsmobiles. (Tr. 1018, 1027,

1040)

27. Also regarding fuel economy, GM notified its dealers

of its planned usage of the LMI engine in some Oldsmobile

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 existing

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 LMI engine was uncontradicted. (Tr.

686; DX 6, PX 40) Hence, steps were taken to supply con-

sumers with proper EPA estimates for the LMI 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 “estimates” even

by the EPA. (PX 169, 1970, 40; DX 6) Promotional materials

introduced by the parties reflect the caveat to consumers that:

“EPA mileage ratings are estimates and your mileage

may vary according to your own driving habits, the

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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 conducted 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 LMI 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 LMI

engine in the objectors’ own demonstration actually exceeded

the combined city/highway EPA estimate for both the LM1

and L34 engines. (Tr. 1546, 847; PX 169, 226, 227)

29. With respect to the L65 350 engine, Johnson testified

that it is similar to the LMI engine and has the same short

block. (Tr. 1146) Because the L65 engine develops somewhat

less horsepower with a two-barrel carburetor, he concluded that

its durability would be at least equal to or greater than that of

the LMI engine. (Tr. 1147) Johnson also testified that the

performance or acceleration of the L65 would be less than that

of the L34 engine by about the same amount as the LM1’s

performance 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 LMI and L34 engines. (Tr.

1148) No significant evidence contradicting these conclusions

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 parameters of

reasonableness and fairness. However, the objectors have

raised other objections to the settlement which the court also

has considered in reaching its conclusion. The principal!

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remaining objections are discussed in the balance of these

findings.

Transmission Usages

31. The objectors contended at the hearing that Oldsmo-

bile used a different and less expensive transmission with the

LMI engine in Delta 88 coupes and sedans than it used with the

L34 engine in those vehicles. The record does not support this

contention. Oldsmobile’s Director of Material Control testified

that, effective March 30, 1976, Oldsmobile had released the

THM 200 transmission for use with L34 engines in 1977 Delta

88 coupes and sedans. (DX 10; Tr. 653-55) Other evidence

introduced by the objectors indicates that the THM 200 trans-

mission was planned for use with the L34 engine in Delta 88

cars prior to the decision in September, 1976 to use the LMI

engine in some of those cars. (PX 127, pp. M5884, M5914)

Oldsmobile production figures verify that all 1977 Delta 88

coupes or sedans were equipped with a THM 200 transmission

regardless of whether the L34 or LMI engine was installed in

them. (DX 9; Tr. 657) In fact, both 1977 Delta 88 cars used by

the objectors in their road comparison had THM 200 trans-

missions. (Tr. 238)

Replacement Parts Prices

32. The objectors maintained that a relevant measure of

Jamages would be the net differential in the suggested retail

eplacement parts prices for the LMI and the L34. The

*vidence is conflicting on this point since GM’s evidence shows

he Chevrolet-produced engine to be slightly more expensive

han the Oldsmobile-produced engine if purchased as a replace-

nent part. (DX 57) The objectors claim that the Oldsmobile

‘eplacement parts cost over $400 more than the Chevrolet

yarts. (Tr. 748)

33. The court does not find it necessary to resolve this

‘videntiary conflict since the objectors’ evidence, even if accept-

:d, has little or no probative value. (Tr. 747-53, 868) There is

10 showing that replacement parts prices reflect quality or other

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relevant differentials between the two engines as opposed to

differences in volume, distribution methods, packaging, and

other matters related uniquely to the replacement parts busi-

ness. To whatever extent relevant, the objectors’ evidence

Suggests that the estimated manufacturing costs of the two

engines were closely equivalent (PX 115) and that, insofar as

Oldsmobile Division is concerned, it was more costly for it to

use the LMI engine rather than the L34 engine. (Tr. 685, 698)

Conduct of Negotiations

34. The objectors also complain that the settlement was

negotiated in a manner inconsistent with the court’s pretrial

orders. This objection, even if valid, does not bear on the

adequacy of the proposed settlement and would not constitute

sufficient grounds to withhold an otherwise fair settlement from

consideration by the subclass members. However, since the

issue is raised, a discussion of it is appropriate.

35. The settlement was negotiated by the Consumer

Protection Committee of the National Association of Attorneys

General, representatives of which appeared before the court on

December 19, 1977 to apprise the court of the settlement.

(Transcription of Proceedings, 12/19/77, pp. 3-9, 23-26) The

offer to subclass members is part of a larger settlement package

negotiated by the attorneys general in their capacities as official

law enforcement officers with responsibility for enforcing the

consumer protection laws of their respective states. (Settlement

Agreement; Transcript of Proceedings, 12/19/77, pp. 23-26; Tr.

432, 438-39) Two of them, the attorneys general of Alabama

and Illinois, are also counsel for class representatives in this

litigation. The record reflects that the negotiations between

GM and the attorneys general were known to at least some

private counsel in advance of the settlement. (Tr. 442;

Transcript of Proceedings, 12/ 13/77) When the fact of the

negotiations was first raised with the court, no plaintiff claimed

that the court’s orders were being violated, and the court

encouraged the negotiations to continue. (Transcript of Pro-

ceedings, 12/13/77, pp. 11-12, 16)

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36. Partly because private counsel for the class were not

involved directly in the settlement negotiations, the court

allowed them full opportunity for discovery into its adequacy

and for clarification of its terms. Private plaintiffs’ counsel

availed themselves of that opportunity and, as noted, six of

them have concluded that the settlement is fair and reasonable

in light of the ensuing investigation. (Tr. 18-20, 937-41) Full

opportunity has been given to the objectors to call to the court’s

attention any and all complaints regarding the settlement terms.

Under the circumstances, the court is assured that no prejudice

has resulted to the subclass members by reason of the manner

in which the settlement was negotiated.

Post-April 10 Purchasers

37. The objectors also express concern that approval of the

proposed settlement will somehow prejudice the interests of

class members who are not also members of the subclass. The

court does not find this to be the case. The litigation will

proceed as to post-April 10 purchasers without any prejudice to

such legal rights and interests as they otherwise might possess.

As observed in the ruling establishing a subclass and as further

2videnced in the hearing record, there are significant factual

Jistinctions between the subclass members and other class

members which justify selection of April 10 as a reasonable line

of demarcation between them for settlement and other pur-

soses. (DX 37)

>unitive Damages

38. The parties are in disagreement over whether the

Magnuson-Moss Act can be interpreted to authorize punitive

lamages in cases such as these. The court does not find it

lecessary to resolve that legal question in the context of its

onsideration of the settlement’s fairness. Both sides introduced

ubstantial evidence that GM’s decision to use the LM1 engine

n Oldsmobiles was made by Oldsmobile management to satisfy

inexpectedly high consumer demand for cars equipped with

nd

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350 cubic inch engines, after it became clear that such demand

was likely to outstrip Oldsmobile’s productive capacity for its

L34 engine. (PX 127, pp. M5794, M5814, M5835, M5878,

M5889-94; PX 117; DX 40; Tr. 616, 669) There is evidence that

it is common industrial trade practice for manufacturers, in-

cluding automobile manufacturers, to use parts and com-

ponents, including engines and engine parts, supplied by out-

side concerns. This same practice is and has been common

among and between GM’s various divisions. (PX 101, DX 44;

Tr. 155-56, 600, 617-19, 622-24, 1152-57) There is also evi-

dence that Oldsmobile evaluated the LMI and L34 engines and

found them comparable from an engineering standpoint prior

to the start of their use in production. (DX 17; PX 115; Tr.

688) It was not disputed that Oldsmobile took affirmative steps

promptly after its decision was made and before the Start of

production to notify dealers of the change in engine availability

(PX 179, 180) and specifically to delete references to “Rocket”

350 engines in promotional materials with respect to those

models in which the LMI engine was to be used. (PX 78, 81-

84, 120; Tr. 371, 377, 381)

39. Based on the hearing record, the court is persuaded

that the interests of the subclass members would not be well

served by withholding the proposed settlement from them

against the objectors’ contention that a claim for punitive

damages eventually might be made out and sustained.

Engine Servicing

- 40. The recommended tune-up schedules for the LM1 and

L34 engines suggest one more tune-up for the LMI than for the

L34 over a 100,000-mile engine life. Johnson testified that the

additional tune-up was included in EPA certifications to main-

tain emissions levels in conjunction with manual transmissions

and that the LMI engine had, in fact, operated fully satisfac-

torily even when maintained in accordance with the tune-up

intervals recommended for the L34. (Tr. 1001-02) This

information was not, however, available to purchasers.

18a

41. The evidence indicates that the L34 engine may

experience somewhat better oil economy than the LMI,

although the degree of difference is not reliably estimated in the

record. (Tr. 1062-63) The evidence also indicates, however,

that oil economy differences would not affect durability or

performance. (Tr. 1062) No evidence was offered indicating

that the discounted value of any oil economy difference which

might exist involved a significant financial detriment.

Value of Insurance Certificate

42. The parties dispute the retail premium value to

consumers of the insurance certificate offered as part of the

settlement and the probable cost of the policy toGM. The only

direct evidence relating to the retail premium value of the

certificate consists of testimony and exhibits offered by a

marketing vice president of GM’s MIC subsidiary. He testified

that, to a person desiring comparable mechanical insurance

coverage in the marketplace, a conservative estimate of the

retail premium that he would be charged was $200. (Tr. 1658-

61, 1674-75; DX 48-56) The objectors dispute this valuation by

arguing that most of the subclass members already possess a

nontransferable certificate of comparable coverage issued by

GM unilaterally in April, 1977, after the litigation commenced.

(PX 190, 192) Instead of a $13 million aggregate retail value,

the objectors place the policy’s value at $3 million. (Tr. 710)

In evaluating a proposed settlement, the court may appropriate-

ly consider the total benefits conferred on the class members by

virtue of the litigation, even though some of the benefits were

conferred prior to the settlement.

43. In truth, except for the indicia of value furnished by

the premium cost of a similar policy, the real value of this

feature of the settlement cannot be presently determined. If, in

the future, there are relatively few mechanical problems with

the Chevrolet-produced engines, the engines will have served

the purchasers well and they will not have been damaged.

Conversely, should the engines encounter a high rate of me-

—

19a

chanical problems, the greater will be the protection and

“value” of the insurance. Since GM’s Premium costs are open-

ended and will be adjusted retrospectively after all the policies

expire (PX 195; Tr. 1656-57), its costs similarly will be lower if

the engines perform well and wiil increase if and as mechanical

problems are encountered with the engines or other covered

power train components.

Other Objections

44. Other objections have been made by the objecting

plaintiffs and individual subclass members which are not

explicitly addressed in these findings. The court has fully

considered them, together with the objections discussed above,

and regards them individually and collectively as being in-

sufficient to cast serious doubt on the adequacy and fairness of

the settlement. To the extent that subclass members may be

dissatisfied individually with the settlement offer, they remain

free to reject it and pursue such other legal recourse as may be

available to them.

20a

CONCLUSIONS OF LAW

1. The cour has jurisdiction over the subject matter and

personal jurisdiction over the parties.

2. Pursuant to Rule 23, Fed.R.Civ.P., the court determines

that the proponents of the proposed settlement have met their

burden of persuading the court that the settlement terms are

fair, reasonable, and adequate to subclass members, notwith-

standing the objections presented to it. Approval will be

granted to communicate the settlement offer to subclass mem-

bers in a form of notice to be approved by the court.

3. On condition that the settlement is implemented, an

appropriate order will be entered dismissing the litigation with

prejudice on behalf of subclass members who accept the

settlement, and dismissing the litigation as to subclass members

who reject the settlement without prejudice to their right to

pursue such individual state law remedies as may be available

to them.

4. The court retains jurisdiction of the subclass litigation to

supervise the settlement in accordance with the Settlement

Agreement dated December 19, 1977. The court retains

jurisdiction over the remaining class litigation for all purposes.

_ ENTER:

/s/ FRANK J. MCGARR

UNITED STATES DISTRICT JUDGE

DATED: July 17, 1978

2la

IN THE

UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF ILLINOIS

EASTERN DIVISION

In re

GENERAL MOTORS

CORPORATION { MDL Docket No. 308

ENGINE INTERCHANGE

LITIGATION |

ORDER APPROVING SUBCLASS SETTLEMENT

Pursuant to Findings of Fact and Conclusions of Law

entered this day, the court hereby orders that:

1. The settlement proposed by defendant of the subclass

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 members 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.

22a

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

accept the settlement shall be and is hereby dismissed as to

jefendant General Motors. Dismissal as to those persons shall

ye without prejudice solely to their rights to pursue such other

‘emedies as may be otherwise available to them.

6. The court retains jurisdiction over the subclass to

upervise implementation of the settlement, and retains

urisdiction as to the balance of the full class for all purposes for

which the class was initially certified.

ENTER:

/s/ FRANK J. McGARR

UNITED STATES DISTRICT JUDGE

DATED: July 17, 1978

——————r ——

23a

IN THE

UNITED STATES COURT OF APPEALS

For THE SEVENTH CIRCUIT

In re

GENERAL MOTORS CORPO.)

RATION ENGINE _INTER-

CHANGE LITIGATION.

Appeal of: Betty Oswald, on her own

behalf and on behalf of all other

persons similarly situated, and Phil No. 78-2036

Miller and Eileen Miller, on their . Argued S “ 28. 197

behalf and on behalf of all other (HefiGcg Ken, 96. loys

persons similarly situated, eb. 26, 1979

Plaintiffs- Appellants,

v

GENERAL MOTORS CORPO-

RATION,

Def endant- Appellee. |

Before FAIRCHILD, Chief Judge, and BAUER and

WOOD, Circuit Judges.

HARLINGTON WOOD, Jr., 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 against GM in the

state and federal courts. The Judicial Panel on Multidistrict

Litigation 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 proceed-

ings 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 ap-

proved the settlement of the actions as to one of two subclasses

of Oldsmobile purchasers.

This appeal is from the order of the district court approv-

ing 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:

24a

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 negotia-

tions that led to the settlement?

Fourth, did the district court err by dismissing with prej-

udice the federal claims of those class members who declined to

release their state law claims pursuant to the settlement agree-

ment?

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. Be-

cause the Chevrolet Division had a significant surplus produc-

tion capacity, GM planners decided to rely on Chevrolet

produced engines to meet part of the engine requirements of

GM’s Buick, Oldsmobile 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

eeeeeEeEEeEeeeEeeeeeEeeEeEe—e—e——eeEeEe—ee—eEeEeEe—eEeEeEeEeEeEeEeEeEeEeEeEeEeEeEeEeEeEeEeEeEeEeEeEeEeEeEeEeeeeeSGEeeeeee

25a

Rocket was given the code “LM1.”"1 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 com-

ponents in Oldsmobiles was not confined to engines. GM used

different components than it had used in previous 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 coupes and sedans the

THM 200 transmission instead of the THM 350, the trans-

mission 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 maintain that GM’s advertising mate-

rials nevertheless indicated that the THM 350 was standard

equipment in all 1977 Deltas.

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 Busi-

ness Practices Act, Ill.Rev.Stat. ch. 121%, §§ 261-272, the

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

Oldsmobiles: the LMI, 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 displacement

engine. The class eventually certified by the district court

includes all purchasers of Oldsmobiles with Chevrolet engines

regardless of which of the three Chevrolet engines the pur-

chasers actually received.

26a

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.2 The

complaint alleged that the sale of the Oldsmobiles without

disclosure of their engine source violated the Magnuson-Moss

Act, IS U.S.C. §§ 2301-2312, and sought certification of the

2 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 complaint 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. § 1337. 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 jurisdictional amount necessary to maintain a class

action. See Snyder v. Harris, 394 U.S. 332, 89 S.Ct. 1053, 22

L.Ed.2d 319 (1969); Zahn v. International Paper Co., 414 U.S.

291, 94 S.Ct. 505, 38 L.Ed.2d 511 (1973). The number of

named plaintiffs required, however, remains a substantial bar-

rer 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., reprinted in [1974] U.S.Code Cong.

& Ad.News 7702, 7724. Although the Illinois Attorney Gener-

al’s complaint was the only complaint to satisfy the last

jurisdictional requirement, we attach no particular significance

to this fact.

27a

action as a 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 Multi-

district Litigation transferred seven actions then pending in

other federal courts to the Northern District for consolidated

pretrial proceedings.4

3 General Motors characterizes the case before this court as

“only the tip of a litigation iceberg” 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 against

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

actions and thirty-three were brought by state Attorneys Gener-

al. 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

(J.P.M.D.L.1977) (transferring actions to the Northern District

of Illinois for consolidated pretrial proceedings). GM’s inter-

divisional engine program also prompted investigation by the

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

Cas. 962,005 (N.D.Ohio 1977) (rejecting GM’s challenge to

the authority of the Commission to undertake the in-

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

involve 1977 Oldsmobiles, the subject of the litigation before

this court.

4The Oldsmobile actions that eventually were consoli-

dated for pretrial proceedings are: State of Illinois v. GMC, No.

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

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

Central Traditional Congregation v. GMC, No. 78-C-1457

(N.D.IIl.); State of Alabama ex rel. Baxley v. GMC, No. 77-P-

(footnote continued on next page)

28a

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

adopting an agreement of the numerous counsel for the plain-

tiffs in the consolidated cases. The order created an executive

committee of six attorneys to represent the plaintiffs in all

pretrial proceedings. See generally Manual for Complex Litiga-

tion §§ 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 consoli-

dated cases as a class action. The order defined the class as

“fa]ll persons ... who purchased 1977 Oldsmobile automo-

(footnote continued from preceding page)

0881-S (N.D.Ala.); Creel vs. GMC, No. CA-77-P-0440-S

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

Balog v. GMC, No. 77-443 (W.D.P.a.); 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. ).

The various federal actions were consolidated before the

district court for pretrial purposes 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 author-

ity 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.

5 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.

29a

biles 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

jurisdiction over the related state law claims. The trial court

recognized that parellel state court actions were pending, but

rejected GM’s position that the state proceedings should pre-

vent class 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 negotia-

tions 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.

6GM maintains that the negotiations were begun at the

suggestion of the Consumer Protection Committee of the

National Association of State Attorneys General. -

30a

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 Chevrolet engine on or before April

10, 1977, $200 plus a 36-month or 36,000-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 negotiation 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 agreement contemplated payment. The

class originally included all 1977 Oldsmobile purchasers who

bought their cars before October 13, 1977, without knowledge

that the cars had Chevrolet engines. The settlement agreement

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,

7 Several other state Attorneys General have since joined

in the agreement.

3la

however, designate “for purposes of sending the settlement

notice” a subclass of pre-April 11 purchasers.® Notices inform-

ing class members 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 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 Olds-

mobile owners who objected to the settlement and two mechan-

ics 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 memo-

randa of the various sides in the litigation, the district court

entered an order approving the subclass settlement as fair.

Adopting GM’s proposed findings of fact almost verbatim, the

district court found that the engines and other parts included in

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 original

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 agree-

ment.

32a

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.

Il. 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 objector to the

settlement before the trial court, however, maintains that the

trial court’s order approving the settlement is neither a final

decision nor a collateral order within the meaning of 28 U.S.C.

§ 1291.10 Of course, we cannot determine this court’s jurisdic-

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

General made a motion before the trial court requesting

permission to send the settlement notice (with additional

language indicating the pendency of the appeal) to subclass

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

jurisdiction to entertain the motion, but indicated that if it had

had jurisdiction, it would have granted the motion. The

Attorney General then, with the apparent acquiescence of the

plaintiff-proponents and GM, moved this court for relief under

Fed.R.App.P. 8(a). 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 precludes

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

(footnote continued on next page)

33a

tion 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 subject to the require-

ments of Fed.R.Civ.P. 54(b).'1 In an order following its

approval of the subclass settlement, the trial court refused to

make a determination that there was no just reason for delay

(footnote continued from preceding page)

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

plaintiff-proponents. Finally, the Attorneys General from

Illinois and Alabama who represented named plaintiffs in the

trial court constitute the third group. The latter two groups

have aligned themselves with GM on many of the issues in this

appeal.

1 There is considerable doubt whether Fed.R.Civ.P.

54(b) was intended to govern the situation when two distinct

subclasses are created from a single class and one subclass’

right to recover under a settlement neither affects nor is affected

by the merits of the other subclass’ claim. Aside from the

difficulty of construing “multiple parties” to encompass sepa-

rate 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

subclasses accords with the legal effect of creating subclasses

under Fed.R.Civ.P. 23(c)(4). That rule provides that when a

class is subdivided ‘teach 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

consistent with the spirit of the rules to treat each subclass

action as a separate action for all purposes.

34a

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. 12

The Supreme Court has taken an “intensely practical”

approach when deciding whether judgments are appealable.

Mathews v. Eldridge, 424 U.S. 319, 331 n. 11, 96 S.Ct. 893, 47

L.Ed.2d 18 (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, 85

S.Ct. 308, 311, 13 L.Ed.2d 199 (1964). We are cognizant that

the federal policy against piecemeal review admits no exception

merely because the judgment appealed from affects the conduct

of a class action. See Coopers & Lybrand v. Livesay, 437 US.

463, 98 S.Ct. 2454, 57 L.Ed.2d 351 (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

requiring notice to class members is not a collateral order). We

believe, however, that although the federal courts have nar-

rowly interpreted the collateral order doctrine established in

Cohen v. Beneficial Industrial Loan Corp., 337 US. 541, 69

S.Ct. 1221, 93 L.Ed. 1528 (1949), that this case falls within

“that small class which finally determine claims of right sepa-

rable 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, 69 S.Ct. at 1226.

'2 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

entry of judgment under Rule 54(b). See Swanson v. Ameri-

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

1975).

35a

The first requirement of the collateral order doctrine is that

the matter appealed from must have been finally determined by

the district court.13 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

reconsider 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, therefore, is not tentative and it finally

determines the matter appealed to this court.

The second requirement of the collateral order doctrine is

that the matter appealed must be “separable from, and collate-

ral to, rights asserted in the action” and neither affect nor be

affected by decision on the merits. 337 US. at 546, 69 S.Ct. at

1225-1226. Application of this requirement to appeals from

decisions on the fairness of a settlement presents some diffi-

culties. Ordinarily settlements of civil litigation are not re-

viewed by federal courts. Thus, the issue is raised almost

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

Cohen 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, 96 S.Ct. 54, 46 L.Ed.2d 50 (1975).

36a

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, 91

S.Ct. 879, 27 L.Ed.2d 811 (1971), and another has reviewed

such a refusal without expressly considering the appealability

issue, In re International House of Pancakes Franchise Litiga-

tion, 487 F.2d 303 (8th Ciz. 1973).15

Although in Norman the court maintained that appellate

review of the initial determination of the settlement’s fairness

was completely divorced from the merits of the claim, adequate

14 Court approval of settlements is also necessary in bank-

ruptcy reorganization proceedings. See, e. g., Protective Com-

mittee for Independent Stockholders of TMT Trailer Ferry, Inc.

v. Anderson, 390 U.S. 414, 88 S.Ct. 1157, 20 L.Ed.2d 1 (1968).

‘5 The Second Circuit has recently rejected the position

taken by the Eighth and Ninth Circuits and refused to review a

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

derivative action. Seigal v. Merrick, 590 F.2d 35 (2d Cir.

1978). Because this appeal 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 disapproval of a proposed settlement of a repre-

sentative action. In Seiga/ the court stated that “[an approved ]

settlement... is not a deviation from the main path of the

litigating process. It is a step on that path directly leading to

final judgment. An approval of a compromise, after appropri-

ate notice, becomes a final judgment.” 590 F.2d at 38. In the

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

does not lead directly to final judgment. But unlike a dis-

approval 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.

37a

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 Coopers & Lybrand v. Livesay, 437 U.S. at 469, 98 S.Ct.

at 2458 (“the class determination generally involves consid-

erations that are ‘enmeshed in the factual and legal issues

comprising the plaintiff's cause of action’ ”). Nevertheless,

several factors bring this appeal within the separateness

requirement. First, the Supreme Court has not applied 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, 432 U.S. 43, 97 S.Ct. 2205, 53 L.Ed.2d 96

(1977). Moreover, to the extent that this appeal raises issues

about the regularity of the conduct of the settlement negotia-

tions or the fairness hearing, consideration of the merits of the

plaintiffs’ cause of action is unnecessary. Similarly, because

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

38a

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 reimburse-

ment by those who accepted the $200 and received benefits

under the mechanical 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 subsequent 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, 85 S.Ct. 308, 311, 13 L.Ed.2d 199 (1964).

16 These characteristics of the settlement approved by the

trial court distinguish this appeal from the appeal which was

dismissed for lack of an appealable order in Rodgers v. United

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

trial court permitted the defendant to communicate to individ-

ual 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 merely approved 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 participation in the

class action whether they released their claims or not. More-

over, the settlement offer in Rodgers merely promised payment

of back pay in return for signed releases. The Court of Appeals,

dismissing the appeal, noted that the parties 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.

39a

They “cannot make important decisions about ... further

Participation in this suit without having [their] rights deter-

mined now.” Diaz v. Southern Drilling Corp., 427 F.2d 1118,

1123 (Sth Cir.), cert. denied, 400 U.S. 878, 91 S.Ct. 118, 27

L.Ed.2d 115 (1970).17 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 ques-

tions.” Weit 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

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

1157, 1221 (Sth Cir. 1978), cert. denied, ____ US. ra

S.Ct. 1020, 59 L.Ed.2d 74 (1979):

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 opting

into a possibly invalid settlement or being relegated to

individual lawsuits. A decision to opt into the settlement

by endorsing the back pay check and thereby releasing the

company of all liability for past discrimination might

preclude entitlement to a share in a new agreement or

award if the settlement were invalidated on appeal. On the

other hand, a decision to opt-out of the subclass by failing

to cash the tendered check would create the possibility of

receiving no back pay award if the appeal were unsuccess-

ful and an individual lawsuit proved unrealistic. .. .

The procedure adopted by the district court, by

requiring claimants to choose whether or not to opt into the

settlement before they could exercise their right to appel-

late review, unfairly burdened the rights of awardees to

appeal the settlement and thereby significantly under-

mined one of the most important procedural protections

associated with the approval of a settlement. We hoid that

the ability of subclass members to opt into a back pay

settlement may not be terminated before a final determina-

tion of the propriety of that settlement is made.

40a

Cir. 1972). We think this appeal raises at least two important

questions concerning the proper balance between the general

policy of encouraging settlements and a court’s specific duty 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. Because adequate repre-

sentation is the foundation of all representative actions, see

Fed.R.Civ.P. 23(a)(4), Hansberry v. Lee, 311 U.S. 32, 61 S.Ct.

115, 85 L.Ed. 22 (1940), we think this question is appropriately

reviewed at this time. The second question concerns the nature

of the “settlement” that Rule 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 raises issues which could not be effectively reviewed later; and

it presents important, unresolved legal questions for consid-

eration by this court. We hold that the trial court’s order

approving the subclass settlement 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 decision 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 objections to the proposed settlement in the

district court. We consider the arguments in support of the

second alternative first.

4la

It is argued that this court’s decision in Research Corp. v.

Asgrow Seed Co., 425 F.2d 1059 (7th Cir. 1970), compels 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 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 Parties to the

lawsuit; intervention was obviously unnecessary. Moreover,

through their attorneys they vigorously objected to the settle-

ment 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 mem-

bers waive appellate review merely because they failed to take

affirmative action when their interests were already being

adequately represented by participants in the lawsuit. Cf. Ace

Heating & Plumbing Co. v. Crane Co., 453 F.2d 30, 32-33 (3d

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

42a

the proposed subclass settlement informed subclass members

that if they neither opted out of the subclass nor intervened in

the lawsuit that “attorneys for the named plaintiffs will repre-

sent 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

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

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

approval of an unfair settlement constitutes inadequate repre-

sentation). 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 com-

mittee 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 attorney, 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 the class plaintiffs,” not class

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

1177-78 (Sth Cir. 1978), cert. denied, ___. U.S. ___., 99 S.Ct.

1020, 59 L.Ed.2d 74 (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,

acknowledged that “no clear concept of the allocation of

decision-making responsibility between the attorney and the

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

43a

pretrial order prohibits counsel for Oswald and Miller from

representing the interests 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 appealing 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 appro-

val of the trial court is correct, and that the matter is best left

unreviewed by this court. Plaintiff-objectors, of course, dis-

agree. 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 leaving the settlement unreviewed. Cf. McDonald v.

Chicago Milwaukee Corp., 565 F.2d 416, 417 n. 1 (7th Cir.

1977) (permitting briefs and oral arguments by parties who

Se ore, ST ee

z =

44a

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 undermine the representative nature of class

actions significantly and sacrifice the public’s interest in judicial

economy unnecessarily. We hold that plaintiff-objectors Os-

wald and Miller are parties who through their counsel will

fairly and adequately protect the interests of the class in this

appeal. See Fed.R.Civ.P. 23(a)(4) (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 disregard 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, ___. U.S. ___, 99 S.Ct. 1020, 59 L.Ed.2d

74 (1979) (discussing factors relevant to determining whether

the named plaintiff may appoint new counsel to appeal the

approval 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,

BS AI Te Ne om a ee

45a

“the sentiment of the class is but one factor ii our analysis of

the appealability 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.

Id. at 109 n. 1. See also Mandujano 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 settlement as it affects

the entire class. Consequently, we consider the merits of the

objections to the trial court’s approval of the proposed settle-

ment.

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 prohibit-

ing 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

'8In Patterson v. Stovall, 528 F.2d at 109 n. 1, we noted:

“Although in terms of the class and settlement [ appel-

lants’] number and size might be considered miniscule, the

serious issues raised before this Court are not reduced in

their magnitude.”

46a

the fairness of the settlement.'9 The court’s findings of fact,

although finding the irreguiar method of negotiating the settle-

ment did not prejudice subclass members, reaffirmed the court’s

belief 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 examination of the negotiations con-

stituted an abuse of cliscretion.2° In addition, we do not think

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

Attorneys General in the course of the negotiations with

defendant and identify all factual support for such demand, as

well as any documents which relate to such demand or factual

support.” 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 ques-

tioning ,of the Assistant Illinois Attorney General about the

time, place and other aspects of the negotiations, it refused to

permit 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 after

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

clearly indicates that, given the trial court’s limitation 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.

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

particular documents or discussions conceivably could be im-

mune from discovery as attorney work product or as privileged

attorney-client communications, the existence of such privileges

is best determined in the context of particular demands for

(footnote continued on next page)

a A Seer an

SES ne Dee ee Oe

3 ees

ateetan’

47a

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 examination 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 representative

parties will fairly and adequately protect the interests of the

class.” Fed.R.Civ.P. 23( a)(4). The trial court’s duty is height-

ened by its responsibility to review the fairness of any com-

promise of the class action. Jd. 23(e).21

(footnote continued from preceding page)

discovery. Inquiry into the conduct of the negotiations is also

consistent with the letter and the spirit of Rule 408 of the

Federal Rules of Evidence. That rule only governs admissibi-

lity. It simply bars admission of evidence of compromise

negotiations to prove liability or damages and expressly pro-

vides 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 disputed claims without

litigation. That policy is not undermined by 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 should be 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.

21““Before approving a settlement, therefore, the judge

must assure himself that the class has been adequately repre-

sented during the settlement talks, a conclusion which will not

(footnote continued on next Page)

_ a

48a

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 53-54.22 It recommends that before sending

a notice to class members 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?25

Among the reasons for examining whether settlement negotia-

tions 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...

(footnote continued from preceding page)

follow automatically from a finding of adequacy for litigation

purposes.” Developments in the Law—Class Actions, 89

Harv.L.Rev. 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

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

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

McDonald y. 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

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

ere.

23 Manual for Complex Litigation § 1.46 at 53 (Consid-

eration 4).

49a

[A]n individual, lacking official status, knows that a

negotiating defendant may not like his “attitude” and may

try to reach a settlement with another member of the class.

Id. at 59 quoting Act Heating & Plumbing Co. v. Crane Co., 453

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

negotiations create the possibility of negotiation from a position

of weakness by the attorney who purports to represent the

class.24 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.25 The possibility of such a conflict of

interest as a general rule warrants judicial scrutiny of unautho-

rized settlement negotiations. Furthermore, settlement negotia-

tions with less than all class counsel weaken the class’ tactical

position even if the attorney who enters into the negotiations

attempts to represent the tlass’ interests vigorously.26

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] possessed 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).

25 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’”’).

26 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

(footnote continued on next page)

50a

Finally, unauthorized settlement negotiations deny other

class counsel access to information about the negotiations which

is helpful in evaluating the fairness of the settlement. “[T]he

options considered and rejected, the topics discussed, the

defendant’s reaction to various proposals, and the amount of

compromise necessary to obtain a settlement”27 were all mat-

ters which class counsel excluded from the negotiations needed

to consider before exercising their fiduciary duties to the class

by accepting the settlement.28

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 than the trial

court permitted.

(footnote continued from preceding page)

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 abandoned, 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.

27 Developments in the Law—Class_ Actions, 89

Harv.L.Rev. 1318, 1562 (1976).

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

It is little comfort to objector Frackman that plaintiffs’ counsel

may have examined the documents sought by objector during

the course of ... discovery. As an objector, Frackman 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, Proposed Uniform Class Action Act § 12(c)(4)

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

settlement to class members shall include “ta description and

evaluation of alternatives considered by representative

parties”).

Sla

The record establishes that the settlement presented to the

court by the Illinois Attorney General was either (1) negotiated

without the permission of the other class counsel 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’ at-

torneys. The Attorney General’s Assistant was a member of the

committee and therefore subject to the pretrial order’s restric-

tions. Nevertheless, he participated in negotiations with GM

without the consent of other counsel.

If the negotiations did proceed in violation of the trial

court’s pretrial order,29 we think that the plaintiff-objectors

29 The trial court found that at least some private counsel

knew of the negotiations between GM and the Attorneys

General 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 negotia-

tions 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

private 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.,

reducing 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.

(footnote continued on next page)

52a

were entitled to discovery to determine whether the negotia-

tions 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 negotia-

tions 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

proponents 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).9°

(footnote continued from preceding page)

After the submission of the proposed settlement agree-

ment, 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 seitlement’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 negotiations. As noted supra, class

counsel should know the options considered and the topics

discussed during the negotiations before supporting a settle-

ment as fair. In the absence of such familiarity of counsel with

the conduct of the settlement negotiations, the inference of

fairness to be 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 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 evi-

dence. 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 question of prejudice aside, it is clear that the trial

(footnote continued on next page)

53a

The Assistant. Illinois Attorney General maintains, how-

ever, 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 Court of Cook County.31 The motion

(footnote continued from preceding pc

court did not require the p. ponents of the settlement 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 producing 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 indeed have misplaced

the burden.

31 During the fairness hearing, Mr. Mulack, the Assistant

Illinois 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. —

... [T]wo 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 Consumer Fraud

Act, in the Circuit Court of Cook County, and the other as

a punitive class representative in the Federal Court Ac-

Gon...

I was perfectly aware of the limitations in Pre-Trial

Order No. 1, that prohibited either myself or any repre-

sentative of the Attorney General’s office from taking part

in nationwide negotiations on this particular class action.

(footnote continued on next page)

54a

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, 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

(footnote continued from preceding page)

With that particular concern and that understanding, I had

approached the posture of the overall negotiations.

Now. attendant at those meetings were Assistant

Attorneys General literally from every state that had a

major action going against General Motors. Each of those

Attorneys 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 in-

troduced, 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.

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 Attorneys

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 entire action in accordance

with the terms of the agreement.

a

5Sa

Assistant Attorney General admitted during the fairness hear-

ing 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.33 Assuming arguendo that the Attorney General’s office

did not violate the pretrial order and thus participated in the

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

F.Supp. 401-02 (S.D.lowa 1968); State of Minnesota v. United

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

33 Cf. Hawaii v. Standard Oil Co., 405 U.S. 251, 266, 92

S.Ct. 885, 893, 31 L.Ed.2d 184 (1972) (“Parens patriae actions

may, in theory, be related to class actions, but the latter are

definitely preferable in the antitrust area. Rule 23 provides

specific rules for delineating the appropriate plaintiff-class,

establishes who is bound by the action, and effectively prevents

duplicative recoveries” ).

The class action, although it also provides a vehicle for

furthering the substantive policies behind legislation, is prima-

rily a device to vindicate the rights of individual class members.

We also note that the Magnuson-Moss Act does provide that

the United States Attorney General and the Federal Trade

Commission may go 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 public’s interest in

enforcement of its provisions. It does not leave protection of

the public interest up to the Attorneys General of the fifty

states. Compare 15 U.S.C. §§ 15a-15h (explicitly vesting power

in state Attorneys General to maintain actions against persons

engaged in anti-competitive practices which harm state con-

sumers ).

56a

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 dispe! 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, then it was

negotiated in the name of, at best, only one of the named

plaintiffs in the federal action, the State of Illinois. This

stretches the theory of representation of absentee interests by

the named plaintiff to its limit34 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.

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.35 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

34In their briefs and during oral argument the parties

devoted a good deal of time to a discussion of whether a

settlement could be approved over the objections of some of the

named plaintiffs. We agree witn General Motors that the

unanimous 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 ora! 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.

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

sideration | ).

57a

responsive. Moreover, because the proposed settlement con-

templated the release of all claims relating to component

substitutions, not just the engine interchanges, the range of

possible damages to class members was unclear. It is not

possible to tell from the record how fully informed the At-

torneys General may have been about the value of the claims

they were surrendering.36

Not only was the settlement arguably hasty, but also the

settlement agreement contemplated the abandonment of the

prosecution of the claims of post-April 10 class members.37. 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 Oldsmo-

biles before April 11, 1977, despite the original certification of

the class to include those who purchased before October 13.

GM subsequently formally moved the court for such a revised

class definition to conform to 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 in-

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

and the brie $ 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 negotia-

tions, of course, prevented the objectors from making such a

record. To this day, we have no idea how the participants in

the negotiations arrived at the settlement package of $200 plus

the extended power train warranty.

37 See id. at 54 (Consideration 6).

58a

adequate as to all Oldsmobile purchasers who constituted the

original class.%®

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

attempted to create a subclass also may have seriously jeopard-

ized the rights of the post-April 10 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 class action after

the settlement with *he pre-April 11 subclass.

The trial court has broad discretion in determining wheth-

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

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

U.S. 912, 96 S.Ct. 3200, 49 L.Ed.2d 1204 (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(c)(4)(B). Division of a class or potential

class into subclasses to account for differences in proof that may

be required at trial is clearly permissible. See, e. g., Dorfman v.

First Boston Corp., 62 F.R.D. 466, 476 (E.D. Pa.1973) (creat-

ing subclasses to account 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 appropriate “‘a class may be divided

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

provisions of this rule shall then be construed and applied

accordingly.” Fed.R. Civ.P. 23(c)(4)(B). The rule con-

templates 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

(footnote continued on next page)

59a

pensate 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

(footnote continued from preceding page)

(10th Cir. 1975). The trial court made no finding that the post-

April 10 subclass could be maintained as a class action. The

record shows instead that the trial court attempted to create a

single subclass 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 post-April 10 claims.

See generally Winokur v. Bell Federal Savings & Loan Associ-

ation, 560 F.2d 271 (7th Cir. 1977), cert. denied, 435 U.S. 932,

98 S.Ct. 1507, 55 L.Ed.2d 530 (1978); Susman vy. Lincoln

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

City of Greenville, 578 F.2d 987 (Sth 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 determined that

the action cannot be maintained, the statutes of limitation may

preclude individual lawsuits in the state courts.

The questions raised about the viability of the subclass

action 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-

quacy of the representation of each subclass. Cf. Manual for

Complex Litigation § 1.46 at 59-61 (condemning tentative

classes for settlement purposes ).

60a

private attorneys’ fees in the federal action “in an amount no

greater than the amount of documented time actually ex-

pended... multiplied by the hourly fee prevailing... in the

community.” These amounts were in addition to the amounts

promised class members accepting the settlement. The notice

to subclass members informed them of even less than was

provided by the agreement,39 and the record does not provide

any reliable estimate of the aggregate amount of attorneys’ fees

and expenses that GM will eventually pay.40 We think the

proposed settlement’s estimate of attorneys’ fees and expenses

is so vague that subclass members could not determine the

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 of

$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 private 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 understanding is that

GM 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 alloca-

tion of the payment a matter for determination by the recipients

of the payment. The agreement apparently contemplates 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.

6la

possible influence of attorneys’ fees on the settlement in consid-

ering whether to object to it.41

Aside from some doubt about whether Attorneys General

who, of course, are compensated by the public may ever

recover attorneys’ fees and expenses,42 we believe that the

method by which the GM-Attorneys General agreement con-

templates 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 defendant(s) over and

above the settlement. Frequently, the amount thereof is

not disclosed at the time the settlement is proposed. Such

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

sideration 7).

42 The Manual regards the question of whether publicly

employed counsel may be allowed reimbursement for expenses

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 Anti-

trust 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 part because the At-

torneys General presumably would not seek attorneys’ fees.

See State of Illinois v. Harper & Row Publishers, Inc., 301

F.Supp. 484, 494-95 (N.D.III.1969); State of Minnesota v.

United States Steel Corp., 44 F.R.D. 559, 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 com-

municate 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 proportion of the

expenses, if not all, are due to state court litigation.

62a

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 reason-

ableness of the amounts to be paid to plaintiffs’ counsel

since any reduction by the court in the amount counsel

agree upon after the class settlement has been approved

will simply go to reduce the aggregate amount defend-

ant(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 judg-

ment 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. Chicago Milwaukee Corp., 565

F.2d 416, 426 (7th Cir. 1977). We do not overrule that

decision, but do regard the questionable provision made for

expenses and attorneys’ fees as one factor requiring exam-

ination of the settlement 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 prej-

udiced the best interests of the class. Regardless of which of the

two possible capacities the Illinois Attorney General's office

63a

assumed in negotiating 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 trial, we conclude with a discussion of what we

do not hold.

We do not hold that irregular settlement regotiations 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 Milwaukee Corp., 565 F.2d 416 (7th Cir.

1977).43 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

43I1n McDonald the objectors to a settlement contested,

inter alia, the negotiations conducted in connection with a

related state court action. The negotiations had begun prior to

the commencement of the federal action which was filed only

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

tions resumed prior to class certification, but largely because the

trial court delayed certification of the class during the negotia-

tions. Significantly, the trial court was never afforded an

opportunity to pass.on the issue of the propriety of the

negotiations because the objector failed to raise the issue there.

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 irrelevant. Finally,

the record contains some evidence suggesting that the settle-

ment negotiations prejudiced the class.

64a

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 representa-

tion of the class during the negotiations was adequate and that

the settlement itself is fair.44

44 Although the trial court concluded that the settlement of

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

settlement negotiations necessarily casts doubt upon that con-

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

the court's conclusion finds clear support in the record.

The most important factor relevant to the fairness of a

class action settlement is the strength of plaintiffs 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 plaintiffs prevailing on the merits times

(2) the present value of probable damages plaintiff would

recover if he did prevail. We do not expect the trial court's

conclusions to be set forth with mathematical precision. A

fairness hearing is not a trial on the merits. The trial court,

however, does have a duty to members of the class and to the

reviewing court to assess, if not decide, the 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

apparently 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

_understand 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

all Delta purchasers, not just those who received Chevrolet

engines.

On the issue of compensatory damages, the trial court

framed the issue as the “comparability” of the Oldsmobile

(footnote continued on next page)

65a

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 proposed settlement is inevitably reversible error.

(footnote continued from preceding page)

engines allegdly warranted and those Chevrolet engines re-

ceived. The findings then recite a mass of technical data

indicating that the durability, performance and fuel economy of

the Chevrolet and Oldsmobile engines were not materially

different. The evidence on these technical issues was conflict-

ing, 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 they had been as warranted.

...” U.C.C, § 2-714(2) (emphasis added). This is presum-

ably 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 presented evidence tending to establish a difference in

value 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 settlement 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, particularly economic

facts’’).

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

of recovering punitive damages against GM. The court de-

clined 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

disregard of the rights of Oldsmobile purchasers. We think the

objectors presented 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 they

were unavailable under the Magnuson-Moss Act. Although

(footnote continued on next page)

66a

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

(footnote continued from preceding page)

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.Supp. 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 damages and other

legal and equitable relief.” 15 U.S.C. § 2310(d)(1). Although

this broad language falls short of express statutory author-

ization for an award of punitive damages, we do not believe as

GM does that punitive damages are never recoverable under

federal law unless expressly authorized. See Globus v. Law

Research Service, Inc., 418 F.2d 1276, 1284 (2d Cir. 1969),

cert. denied, 397 U.S. 913, 90 S.Ct. 913, 25 L.Ed.2d 93 (1970);

Comment, Punitive Damages Under Federal Statutes: A Func-

tional Analysis, 60 Calif.L.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. § 1-106( 1), McGrady v. Chrys-

ler Motors Corp., 46 Ill.App.3d 136, 4 Ill. Dec. 705, 360 N.E.2d

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

377 (Ind.App. 1976), this general 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 Sales § 25-13 (4th ed.

1974); R. Nordstrom, Sales § 155 (1970).

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 in-

substantial and that this possibility as well as the probable

compensatory damages were given insufficient weight by the

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

67a

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

Cir. 1976). We do hold he 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.45

We noted in McDonald vy. 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 per se

rules rigidly confining the trial court’s exercise of its discretion

in 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 the evidence in the

record indicating that the irregularities 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

settlement, 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 sur-

rounding its negotiation, we would have to find the settlement

defective in another respect. Although the defect may affect

45 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 Illinois has negotiated a settlement without the partici-

pation of other counsel representing the class. See Liebman v.

J. W. Petersen Coal & Oil Co., 73 F.R.D. 531 (N.D.II.1973).

68a

only a small portion of those to whom GM’s offer would be

extended, convenience and expediency cannot justify the dis-

regard 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.46

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 never-

theless dimisses with prejudice the subclass member’s federal

claim.48 The 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 settle-

ment in its present form to stand.

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

47 The signed release, of course, operates to preclude the

accepting subclass member from proceeding on any state claims

he may have against GM.

48 The relevant paragraphs of the trial court’s order pro-

vide:

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.

69a

GM argues that the form of the settlement is not unusual.

It argues that non-consenting 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 members 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 limited 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 jurisdiction over the stace claims, was

without power to extinguish them. The form of settlement with

its unusual use of individual releases was apparently agreed to

by GM and the Attorneys,General in recognition of the federal

court’s inability-t6 : settle the state claims of subclass members.49

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).

70a

The opt-out provision which permits nonconsenting subclass

members to pursue state remedies is a necessary consequence of

the limited jurisdiction of the federal courts.

We do not disagree with GM’s statement that class mem-

bers can be bound by a settlement over their objections and

that the same is true of objecting named plaintiffs.5° Similarly,

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 representa-

tive without each class member’s individual consent. 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 main-

tained 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 provide, with ex-

ceptions not important here, that they shall “govern the proce-

dure in the United States district courts in ail suits of a civil

nature... .” Fed.R.Civ.P. I (emphasis added). Although Con-

gress 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, 91

S.Ct. 63, 27 L.Ed.2d 63 (1970). We think neither the language

of the Magnuson-Moss Act nor its legislative history clearly

manifests Congress’ intent to supersede Rule 23(e).

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

(footnote continued on next page)

Tla

we agree that Rule 23 was amended to eliminate the spurious

class action. We do not think that it follows, however, that the

tria} court has the power under Rule 23 to dismiss with

prejudice the Magnuson-Moss claims of those subclass mem-

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

(footnote continued from preceding page)

plaintiff is a proper party to represent the class. 15 U.S.C.

§§ 2310(a)(3), 2310(e). The explicit mention of the appli-

cability 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

resolution necessarily preclude the later settlement of a class

action without individual consent by each class member. In-

deed, 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 instead

suggests that Congress had 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 proce-

dure or any other settlement procedure the representative

party would negotiate on behalf of the 100 named plain-

tiffs 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 Eisen v. Carlisle & Jacquelin, 417

U.S. 156, 94 S.Ct. 2140, 40 L.Ed.2d 732 (1974), and perhaps

indicates Congress’ intention to make Rule 23(c)(2) in-

applicable in some class actions maintained under the

Magnuson-Moss Act. See H.R.Rep.No. 93-1107, 93d Cong.,

2nd Sess., reprinted in [1974] U.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.

72a

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

with a penalty, the dismissal of their federal 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 rights or benefits in return for

others.”” McDonald 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.5' The right to pursue state remedies is not a

benefit, because, as discussed above, the class members pos-

sessed 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 dis-

missal 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 settle-

ment. Reconciling such a “settlement” with notions of fair play

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.

73a

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.

Our objection to the form of settlement in this case is

similar to the Second Circuit’s objection to “fluid class recov-

ery.” See Eisen v. Carlisle & Jacquelin, 479 F.2d 1005 (2d Cir.

1973), vacated and remanded on other grounds, 417 U.S. 156,

94 S.Ct. 2140, 40 L.Ed.2d 732 (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 action under the Magnuson-

Moss Act.52 We hold the trial court’s approval of the form of

settlement here was unauthorized by the Federal Rules and was

inconsistent with the trial court’s responsibility to act as the

protector of the interests of absentee class members.

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 nonconsenting subclass member to

his state remedies severely reduces his chances of obtaining an

adequate recovery on his claim.

The nonconsenting subclass member loses the advantages

and economies of having his interest represented in the class

52 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.

74a

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

device to vindicate the interests of the victims of mass produc-

tion 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-

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

* * *

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 [sic] 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 coun-

tenance 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. Furthermore, 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 re-

medies, 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

75a

and is full of pitfalls for consumers seeking recovery for

defective products.” Smith, The Magnuson-Moss Warranty Act:

Turning 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.

§ 2310(d)(2). Thus, the dismissal 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 settle-

ment, 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

53 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

provide a more certain remedy than is provided under state law

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 purposes

of the laws sought to be enforced. See generally DuVal, The

Class Action as an Antitrust Enforcement Device: The Chicago

Experience (Part II), 1976 A.B. Foundation Research J. 1273.

76a

opposition by alleged class members. Such parties typi-

cally do not have the time, money or knowledge to safe-

guard their interests by presenting evidence or advancing

arguments objecting 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 to respond to court communications.54 Acquies-

cence to a bad deal is something quite different than affirmative

support.55 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 individ-

ual rights of the minority that the form of settlement proposed

here would work.

54 Because the bulk of the class consists of individual

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

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

F.2d 1079 (2d Cir. ), cert. denied, 404 U.S. 871, 92 S.Ct. 81, 30

L.Ed.2d 115 (1971), in which the court stated that support by

class members was entitled to “great weight.”’ Many of the class

members in Pfizer were large public or private institutions with

large stakes in the litigation. Thus, they could be expected to

come forward to protect their interests. The Pfizer settlement,

however, may not have been in the best iaterest of those

individual consumers represented in the action. See In re

Coordinated Pretrial Proceedings in Antibiotic Antitrust Actions,

410 F.Supp. 706 (D.Minn.1975) (approving subsequent settle-

ment offering consumers substantially higher payments). See

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

Foundation Research J. 251.

55 GM_’s brief indicates that only 26 individuals wrote to

the trial court to express their approval of the settlement.

77a

VI. Directions on Remand

In response to a question from the bench at oral argument,

GM 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.56 Local Rule

22 appears to require the trial court’s approval of any such

communication.5? The question thus presented is whether the

56 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. ...

57 Local Rule 22 of the Northern District of Illinois,

captioned “For Prevention of Potential Abuse of Class Ac-

tions,” provides:

In every potential and actual class action under Rule

23, FRCivP, all parties thereto and their counsel are

hereby forbidden, directly or indirectly, orally or in writ-

ing, 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 commu-

nication by order of the Court. Any such proposed

communication shall be presented to the Court in writing

with a designation of or description of all addressees and

with a motion and proposed order for prior approval by

the Court of the proposed 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 agree-

ments to pay fees and expenses, from potential and actual

(footnote continued on next page)

78a

trial court can approve the communication of the offer, despite

our reversal of the court’s order approving the settlement.

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 commu-

(footnote continued from preceding page)

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 opt out in class actions

under subparagraph (b)(3) of Rule 23, FRCivP; 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

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