Appendix — General Motors Corp. v. French
Supreme Court brief1995
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IN THE
Supreme Court of the Gnited States
OCTOBER TERM, 1995
GENERAL MOTORS CORPORATION,
Petitioner,
Vv.
JACK FRENCH, ROBERT M. WEST, ET AL.,
Respondents.
On Petition for a Writ of Certiorari
to the United States Court of Appeals
for the Third Circuit
APPENDIX
JAMES H. SCHINK, P.C. KENNETH W. STARR
J. ANDREW LANGAN Counsel of Record
ROBERT B. ELLIS PAUL T. CAPPUCCIO
KIRKLAND & ELLIS KIRKLAND & ELLIS
200 East Randolph Drive 655 Fifteenth Street, N.W.
Chicago, Illinois 60601 Washington D.C. 20005
(312) 861-2000 (202) 879-5000
LEE A. SCHUTZMAN RICHARD A. CORDRAY
EDWARD C. WOLFE 4900 Grove City Road
GENERAL MOTORS CORP. Grove City, Ohio 43123
3031 West Grand Blvd. (614) 539-1661
Detroit, Michigan 48232
Attorneys for Petitioner
PRESS OF BYRON 8S. ADAMS, WASHINGTON, D.C. 1-800-347-8208
TABLE OF CONTENTS
PAGE
Opinion Of The Third Circuit Court Of Appeals
Oe te eg cele apes Nd CKie tne rosce la
Opinion Of The District Court, Eastern District Of
ORE 5 ep a 113a
Final Order And Judgment Of The District Court,
Eastern District of Pennsylvania (Dec. 16, 1993) ..... 14la
Agreement Of Settlement (Dec. 16, 1993) .......... 147a
Order Of The Third Circuit Court Of Appeals
Staying Issuance Of Mandate (May 16, 1995) ....... 165a
Se iabsinssitde ee
ADB STS aN Ne hats Ne? amet y aude arathna depen tay
AO i aed y whe
la
APPENDIX A
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
Nos. 94-1064, 94-1194, 94-1195, 94-1198, 94-1202,
94-1203, 94-1207, 94-1208 and 94-1219
In Re: General Motors Corporation Pickup
Truck Fuel Tank Products Liability
Litigation
Jack French, Robert M. West, Charles E. Merritt, Gary Blades,
Dawn and Tracey Best, Gary and Jackie Barnes, Betty
Marteny, John and Mary Southands, Edmund Berning, Dale W.
Plummer, Edmund and Anneta Casey, John and Connie Yonki,
Carl and Kathryn Corona, Dallas and Patricia Nelson, Mynard
and Mildred Duncan, Kirby L. Stegman, DeWayne Anderson,
Morris and Barbara Betzold,
Appellants in No. 94-1064
Rudolph Jenkins, William D. Cunningham, Mather Johnson,
Forrest Charles Ginn, Buren William Jones and Martin D.
Parkman,
Appellants in No. 94-1194
(Civ. No. 92-cv-06450)
PARISH OF JEFFERSON,
Appellant in No. 94-1195
2a
The State of New York
Appellant in No. 94-1198
Elton Wilson, individually, and Frank I. Owen, individually
and on behalf of the residents of the State of Alabama,
Appellants in No. 94-1202
City of New York
Appellant in No. 94-1203
Betty Youngs, Barbara Phillips, Margaret Engel, Larry Swope,
Robbin Maxwell and Center for Auto Safety
Appellants in No. 94-1207
Betty Youngs, Barbara Phillips, Margaret Engel, Larry Swope,
Robbin Maxwell and Center for Auto Safety
Appellants in No. 94-1208
Commonwealth of Pennsylvania, Department of Transportation
Appellant in No. 94-1219
(Civ. No. MDL-961)
Argued: August 11, 1994
Decided: April 17, 1995
Filed: April 17, 1995
Before: BECKER, ALITO, and GIBSON, Circuit Judges
* Honorable John R. Gibson, United States Circuit Judge for the Eighth
(continued...)
Peer eee pee Be ie Ee BO ERT)
ied aie rial Oboe a: ———
3a
James A. Schink, Esquire (Argued)
J. Andrew Lanagan, Esquire
Robert B. Ellis, Esquire
Kirkland & Ellis
200 East Randolph Drive
Chicago, Illinois 60601
George J. Lavin, Jr., Esquire
Francis P. Burns, III, Esquire
Lavin, Coleman, Finarelli & Gray
12th Floor Penn Mutual Tower
510 Walnut St.
Philadelphia, PA 19106
Lee A. Schutzman, Esquire
Edward C. Wolfe
General Motors Corporation
New Center One Building
3031 West Grand Blvd.
P.O. Box 33122
Detroit, Michigan 48232
Attorneys for General Motors Corporation,
Appellee.
Andrew M. Hutton, Esquire
Derek S. Casey, Esquire
Paul Benton Weeks, III, Esquire
Michaud, Hutton, Fisher & Anderson
8100 East 22nd Street North
Building 1200
Wichita, Kansas 67226-2312
* (...continued)
Circuit, sitting by designation.
4a
Attomeys for Jack French, Robert M. West, Charles E. Merritt,
Gary Blades, Dawn Best, Tracey Best, Gary Barnes, Jackie
Barnes, Betty Marteny, John Southards, Mary Southards,
Edmund Berning, Dale W. Plummer, Edmund Casey, Anneta
Casey, John Yonki, Connie Yonki, Carl Corona, Kathryn
Corona, Dallas Nelson, Patricia Nelson, Mynard Duncan,
Mildred Duncan, Kirby L. Stegman, Dewayne Anderson,
Morris Betzold, Barbara Betzold, Dennis Acuma, Appellants.
Diane M. Nast, Esquire (Argued)
William E. Hoese, Esquire
Kohn, Swift & Graf, P.C.
1101 Market Street, Suite 2400
Philadelphia, PA 19107-2927
ELIZABETH J. CABRASER, ESQUIRE (ARGUED)
Michael F. Ram, Esquire
Lieff, Cabraser & Heimann
275 Battery Street, 30th Floor
San Francisco, CA 94111-3339
Attorneys for Dennis Acuma, John E. Martin
Plaintiff Class/Appellees.
John W. Barrett, Esquire
Barrett Law Offices
404 Court Square North
P.O. Box 631
Lexington, MS 39095
Attorney for John Mayhall, Brendan Hayes, Jimmy Benson,
Jimmy Haddock, Dennis Nabors, Marcia Baldwin, Appellees.
Sa
William S. Lerach, Esquire
Milberg, Weiss, Bershad, Hynes & Lerach
600 West Broadway
Suite 1800
San Diego, CA 92101
Attorneys for William A. Lewis, David Grubbs, Raymond
Carver, Johnny S. Martinez, Robert A. Flowers, Stone Ridge
Agri, Inc., James McKinnish, Douglas A. Livingston,
Appellees.
Richard S. Schiffrin, Esquire
Schiffrin & Craig
Three Bala Plaza East
Suite 500
Bala Cynwyd, PA 19004
Attomeys for Johnny S. Martinez, Joseph St. Clair, Appellees.
Patricia J. Clancy, Esquire
Senior Deputy County Counsel
County of Santa Barbara
105 East Anapamu Street,
Suite 201
Santa Barbara, CA 93101
Attomey for City of Los Angeles, Alameda City, Santa Barbara
City, Utah City, Washington, City, Amicus-Appellee.
6a
JAMES E. BUTLER, JR., ESQUIRE (ARGUED)
Robert D. Cheeley, Esquire
Peter J. Daughtery
Butler, Wooten, Overby & Cheeley
1500 2nd Avenue
Columbus, GA 31902
Attorneys for Rudolph Jenkins, William D. Cunningham,
Mather Johnson, Forrest Charles Ginn, Buren Wiiliam Jones,
Martin D. Parkman.
HANS J. LILJEBERT, ESQUIRE
Jefferson Parish Attorney’s Office
New Courthouse Building, Suite 527
Gretna, LA 70053
JERON J. LAFARGUE, ESQUIRE
Jefferson Parish Attorney’s Office
1221 Elmwood Park Bivd., Rm. 701
Harahan, LA 70123
Attorneys for Parish of Jefferson, Appellant.
G. OLIVER KOPPELL, ESQUIRE
Attorney General of the State of New York
Peter H. Schiff, Esquire
Deputy Solicitor General
Nancy A. Spiegel, Esquire
Assistant Attorney General
Andrea Oser, Esquire
Assistant Attorney General
New York State Department of Law
The Capitol
Albany, NY 12224
Attorneys for State of New York,
Appeilant.
Ta
MICHAEL J. EVANS, ESQUIRE
STEVEN D. KING, ESQUIRE
Longshore, Evans & Longshore
2001 Park Place
650 Park Place Tower
Birmingham, AL 35203
Attorneys for Elton Wilson, individually, Frank I. Owen,
individually and on behalf of the residents of the State of
Alabama, Appellants.
John Hogrogian, Esquire
New York City Law Department
100 Church Street
New York, NY 10007
Attorney for City of New York, Appellant.
Brian S. Wolfman, Esquire (Argued)
David C. Vladeck, Esquire
Public Citizen Litigation Group
2000 P Street, N.W., Suite 700
Washington, DC 20036
C. Ray Gold, Esquire
Center for Auto Safety
20001 S Street, N.W.
Washington, DC 20009
Attomeys for Betty Youngs, Barbara Phillips, Margaret Engel,
Larry Swope, Robbin Maxwell, Center for Auto Safety,
Appellants.
8a
Stephen F.J. Martin, Esquire (Argued)
Assistant Counsel In-Charge
Steven I. Roth, Esquire
Assistant Counsel
Robert J. Shea, Esquire
Assistant Chief Counsel
John L. Heaton, Esquire
Chief Counsel
Office of Chief Counsel
Department of Transportation
521 Transportation & Safety Bldg.
Harrisburg, PA 17120
Attorneys for Commonwealth of Pennsylvania,
Appellant.
IT.
Il.
IV.
9a
TABLE OF CONTENTS
FACTS, PROCEDURAL HISTORY,
AND STANDARD OF REVIEW ........... 18a
A. General Background ............... 18a
B. The Settlement Agreement ........... 20a
i Approval of the Settlement and Fees.... 22a
D. The NHTSA Investigation ...... seis
E. Standard of Review ................ 25a
ANATOMY OF THE CLASS CLAIMS ...... 26a
RULE 23--RELEVANT FUNDAMENTAL
PRIN i URN oor a eae ee cect 6% 27a
nt CLMUINE CLASSES ............0503 32a
A. eee ee ?2a
B. Perceived Problems of Settlement Classes 34a
Re, Arguments Favoring Settlement Classes . 41a
D. Are Settlement Classes Cognizable Under
or ce SRP Re ROA Nae ay ar Ree 46a
E. Are the Rule 23(a) and (b) Findings Required
for Settlement Classes? Does Finding
the Settlement to Be Fair and Reasonable
Serve as a Surrogate for the Findings? .. 50a
10a
F. Can There Be a Valid Settlement Class
That Would Not Serve as a Valid
| SEEPS PST Ee 57a
V. IS THE SETTLEMENT CLASS PROPER
. |: pI ree Pes ee one mr ee eee 62a
A. Were There Adequate Findings Under
ET is wre co eeu eee 62a
B. Could the Class Requisites Have Been Met
on the Current Record? ............. 63a
l. Numerosity, Commonality, and
Re 6S Wine A hase g res 63a
2. Adequacy of Representation .... 63a
a The Situation of the Fleet
Re ree 63a
b. Did Counsel Adequately
Represent the Interests of the
Ente Claes? .......... 63a
(1) Class Action Attorneys’
Fees Theory § and
structure ....... 64a
(2) The Stewardship of
Counsel Here .... 69a
VI. IS THE SETTLEMENT FAIR, REASONABLE,
AMD AMMAR 2. oo vic tices k. 72a
lla
A. Adequacy of Settlement--General
PRL. ion Woe bore eke whee: 76a
l. Valuation of the Settlement--
IR 25 cet te re 77a
a. Plaintiffs’ Witness Dr. Itmar
PPPS ERO ae 78a
b. Inability of Class Members to
Use Certificates ........ 79a
c Value of the Transfer
rots 65d oc. 82a
d GM’s Implicit Valuation of the
I Sx che Sikes oo 83a
2. Valuing this Settlement Relative to
the Relief Requested .......... 84a
a. The Retrofit Issue ...... 85a
b. Availability of Other
a
B. Complexity of the Suit ..-...... tek ae
C. Reaction of the Class ............... 89a
D Stage of Proceedings ............... 9la
E. Risks of Establishing Liability ......... 92a
F. Risks of Establishing Damages ........ 96a
G Risks of Maintaining Class Status ...... 99a
VIL.
VIII.
12a
H. Ability to Withstand Greater Judgment . 102a
AWARD
ee ee
13a
OPINION OF THE COURT
BECKER, Circuit Judge.
This is an appeal from an order of the District Court for
the Eastern District of Pennsylvania approving the settlement
of a large class action following its certification of a so called
settlement class. Numerous objectors challenge the fairness
and reasonableness of the settlement. The objectors also
challenge: (1) the district court’s failure to certify the class
formally; (2) its denial of discovery concerning the settlement
negotiations; (3) the adequacy of the notice as it pertained to
the fee request; and (4) its approval of the attorneys’ fee
agreement between the defendants and the attorneys for the
class, which the class notice did not fully disclose, thereby
(allegedly) depriving the class of the practical opportunity to
object to the proposed fee award at the fairness hearing.
The class members are purchasers, over a 15 year
period, of mid- and full-sized General Motors pick-up trucks
with model C, K, R, or V chassis, which, it was subsequently
determined, may have had a design defect in their location of
the fuel tank. Objectors claim that the side-saddle tanks
rendered the trucks especially vulnerable to fuel fires in side
collisions. Many of the class members are individual owners
(i.e., own a single truck), while others are “fleet owners,” who
own a number of trucks. Many of the fleet owners are
governmental agencies. As will become apparent, the
negotiated settlement treats fleet owners quite differently from
individual owners, a fact with serious implications for the
fairness of the settlement and the adequacy of representation of
the class.
While all the issues we have mentioned are significant
(except for the discovery issue), the threshold and most
important issue concerns the propriety and prerequisites of
settlement classes. The settlement class device is not mentioned
l4a
in the class action rule, Federal Rule of Civil Procedure 23.”
? Rule 23 provides, in pertinent part:
(a) Prerequisites to a Class Action. One or more members of a
class may sue or be sued as representative parties on behalf of all only if (1)
the class is so numerous that joinder of all members is impracticable,
(2)there are questions of law, or fact, common to the class, (3) the claims or
defenses of the representative parties are typical of the claims or defenses
of the class, and (4) the representative parties will fairly and adequately
protect the interests of the class.
(b) Class Actions Maintainable. An action may be maintained as
a class action if the prerequisites of subdivision (a) are satisfied, and in
addition:
(1) the prosecution of separate actions by or against
individual members of the class would create a risk of
(A) inconsistent or varying adjudications with
respect to individual members of the class which would establish
incompatible standards of conduct for the party opposing the class, or
(B) adjudications with respect to individual
members of the class which would as a practical matter be dispositive of the
interests of the other members not parties to the adjudications or
substantially impair or impede their ability to protect their interests, or
(2) the party opposing the class has acted or refused to act
on grounds generally applicable to the class, thereby making appropriate
final injunctive relief or corresponding declaratory relief with respect to the
class as a whole; or
(3) the court finds that the questions of law or fact
common to the members of the class predominate over any questions
affecting only individual members, and that a class action is superior to
other available methods for the fair and efficient adjudication of the
controversy. The matters pertinent to the findings include: (A) the interest
of members of the class in individually controlling the prosecution or
defense of separate actions, (B) the extent and nature of any litigation
concerning the controversy already commenced by or against members of
the class, (C) the desirability or undesirability of concentrating the litigation
of the claims in the particular forum; (D) the difficulties likely to been
countered in the management of a class action.
(c) Determination by Order Whether Class Action to be
Maintained; Notice; Judgment; Actions Conducted Partially as Class
Actions.
(1) As soon as practicable after the commencement of an
action brought as a class action, the court shall determine by order whether
it is to be so maintained. An order under this subdivision may be
(continued...)
1Sa
Rather it is a judicially crafted procedure. Usually, the request
for a settlement class is presented to the court by both
plaintiff(s) and defendant(s); having provisionally settled the
case before seeking certification, the parties move for
simultaneous class certification and settlement approval.
Because this process is removed from the normal, adversarial,
litigation mode, the class is certified for settlement purposes
only, not for litigation. Sometimes, as here, the parties reach
a settlement while the case is in litigation posture, only then
moving the court, with the defendants’ stipulation as to the
class’s compliance with the Rule 23 requisites, for class
certification and settlement approval. In any event, the court
disseminates notice of the proposed settlement and fairness
hearing at the same time it notifies class members of the
pendency of class action determination. Only when the
settlement is about to be finally approved does the court
formally certify the class, thus binding the interests of its
members by the settlement.
The first Manual for Complex Litigation [hereinafter
MCL] strongly disapproved of settlement classes.
Nevertheless, courts have increasingly used the device in
recent years, and subsequent manuals (MCL 2d and M.C.L.
3d (in draft)) have relented, endorsing settlement classes under
carefully controlled circumstances, but continuing to warn of
the potential for abuse. This increased use of settlement classes
has proven extremely valuable for disposing of major and
complex national and international class actions in a variety of
substantive areas ranging from toxic torts (Agent Orange) and
medical devices (Dalkon Shield, breast implant), to antitrust
? ©..continued)
conditional, and may be altered or amended before the decision on the
merits....
(e) Dismissal or Compromise. A class action shall not be
dismissed or compromised without the approval of the court, and notice of
the proposed dismissal or compromise shall be given to all members of the
class in such manner as the court directs.
16a
cases (the beef or cardboard container industries). But their
use has not been problem free, provoking a barrage of criticism
that the device is a vehicle for collusive settlements that
primarily serve the interests of defendants-by granting
expansive protection from law suits-and of plaintiffs’
counsel-by generating large fees gladly paid by defendants as
a quid pro quo for finally disposing of many troublesome
claims.
After reflection upon these concerns, we conclude that
Rule 23 permits courts to achieve the significant benefits
created by settlement classes so long as these courts abide by
all of the fundaments of the Rule. Settlement classes must
satisfy the Rule 23(a) requirements of numerosity,
commonality, typicality, and adequacy of representation, as
well as the relevant 23(b) requirements, usually (as in this case)
the (b)(3) superiority and predomi:.ance standards. We also
hold that settlement class status (on which settlement approval
depends) should not be sustained unless the record establishes,
by findings of the district judge, that the same requisites of the
Rule are satisfied. Additionally, we hold that a finding that the
settlement was fair and reasonable does not serve as a surrogate
for the class findings, and also that there is no lower standard
for the certification of settlement classes than there is for
litigation classes. But so long as the four requirements of 23(a)
and the appropriate requirement(s) of 23(b) are met, a court
may legitimately certify the class under the Rule.
In this case the district judge made no Rule 23 findings,
and significant questions remain as to whether the class could
have met the requisites of the rule had the district court applied
them. Principally at issue is adequacy of representation. In
particular, the objectors contend that there is a conflict between
the positions of individual owners on the one hand and fleet
owners on the other hand. The disparity in settlement benefits
enjoyed by these different groups, objectors argue, creates an
intra-class conflict that precludes the finding of adequacy of
representation required by the rule. Moreover, they submit, the
17a
large number of different defenses available under the laws of
the several states involved also creates a potentially serious
commonality and typicality problem.
We conclude that the objectors’ adequacy of
representation claim probably has merit. At all events, the
district court did not properly evaluate the differential impact
of the settlement on individual fleet owners, and should
determine on remand whether the conflicts among class
members are so great as to preclude certification (or at least
sufficient to require the creation of subclasses). The district
court should also focus on the commonality and typicality
problems, to determine whether the national scope of the class
litigation and the plethora of defenses available in different
jurisdictions prevent these requirements from being met.
For the reasons that follow at some length, we conclude
that, although settlement classes are valid generally, this
settlement class was not properly certified. We also conclude
that the settlement is not fair and adequate; more precisely, we
hold that the district court abused its discretion in determining
that it was, primarily because the district court erred in
accepting plaintiffs’ unreasonably high estimate of the
settlement’s worth, in over-estimating the risk of maintaining
class status and of establishing liability and damages, and in
misinterpreting the reaction of the class. Finally, although our
disposition of the foregoing issues makes it unnecessary for us
to pass on the approval of the attorneys fees, we clarify the
governing standards for these fee awards to guide the district
court on remand. We therefore reverse the challenged order of
the district court and remand for further proceedings.
18a
L FACTS, PROCEDURAL HISTORY, AND
STANDARD OF REVIEW
A. General Background
Between 1973 and 1987, General Motors sold over 6.3
million C/K pickup trucks with side-mounted fuel tanks.’ In
late October 1992, after the public announcement of previously
undisclosed information regarding the safety of the fuel tank
placement in GM pickups, consumer class action lawsuits were
filed in several jurisdictions. The National Highway Traffic
Safety Administration (“NHTSA”) commenced an
investigation of the alleged defects relating to side-impact fires
on these trucks, and consumer advocacy groups sought a
recall.‘
On November 5, 1992, plaintiffs in one action sought
to enjoin allegedly misleading communications to putative
class members and filed an application for expedited discovery.
On November 8 and 9, 1992, GM filed notices of removal of
this and other state court actions, and a motion with the Judicial
Panel on Multidistrict Litigation (“MDL Panel”) to transfer and
consolidate all actions for pretrial purposes under 28 U.S.C. §
1407. The MDL Panel transferred all related actions to the
District Court for the Eastern District of Pennsylvania on
February 26, 1993. Ultimately, dozens of actions were filed in
various courts throughout the United States on behalf of
consumer classes; the federal cases were dismissed, remanded
to state court, or transferred to the Eastern District of
Pennsylvania.
On March 5, 1993, pursuant to an order of the
(transferee) District Court, plaintiffs filed a Consolidated
Amended Class Action Complaint seeking equitable relief and
damages that consolidated all of the actions under the MDL
* The class includes both mid-and full-size trucks with chassis model
types C, K, R, or V.
* See note 5 infra.
19a
caption and listed nearly 300 representative plaintiffs,
including both individual and fleet owners. The Complaint
alleged violations of two federal statutes; the Magnuson-Moss
Act and the Lanham Trademark Act; a variety of common law
and statutory claims, including negligence, fraud, breach of
written and implied warranty; and violations of various state
consumer statutes. The complaint sought, inter alia, an order
remedying the alleged abnormally high incidence of fuel-fed
fires following side-impact collisions by requiring GM to recall
the trucks or pay for their repair. (JA 37, 93.) GM answered
this complaint, denying all substantive allegations and raising
numerous affirmative defenses.
Also on March 5, 1993, plaintiffs filed a consolidated
motion for nationwide class certification. The court set July
19, 1993, the hearing date on this motion. On March 30, 1993,
GM moved to stay this litigation pending the outcome of the
NHTSA investigation, initiated in December 1992. This
motion was denied on June 4, 1993. Pursuant to a scheduling
order issued by the court, discovery during the spring of 1993
focused on class certification issues. (JA1 824-27.) During this
discovery, GM produced more than 100,000 pages of
documents from prior C/K pickup product liability lawsuits and
GM’s responses to NHTSA information requests. Plaintiffs
also had access to the depositions and trial testimony in other
cases involving the fuel tank design of C/K pickups, including
the jury trial in Moseley v. GM, No. 90-V-6276 (Fulton
County, Ga.). Plaintiffs consulted with their own experts to
e~tluate this information. In addition, depositions were taken
-t some GM personnel and certain named plaintiffs. Discovery
on the merits of the case had been postponed until autumn
1993. Nothing in the record indicates that, as of the spring of
1993, counsel had identified expert witnesses for trial or
deposed GM’s engineering experts.
In the midst of these proceedings, the parties began
exploring a possible settlement of the litigation. These
discussions intensified in June 1993, at which time face-to-face
20a
and telephonic meetings, both between the parties and among
plaintiffs’ counsel, took place on virtually a daily basis. On
July 19, 1993, the parties reached a settlement in principle,
reduced the terms to writing, and informed the district court.°
For purposes of settlement only and without prejudice to GM’s
substantial opposition to class certification, the named parties
agreed to the certification of a settlement class of C/K pickup
owners, described below.
B. The Settlement Agreement
In general terms, the settlement agreement provides for
members of the settlement class to receive $1,000 coupons
redeemable toward the purchase of any new GMC Truck or
Chevrolet light duty truck. Settlement certificates are
transferable with the vehicle. They are redeemable by the then
current owner of the 1973-86 C/K and 1987-91 R/V light duty
pickup trucks or chassis cabs at any authorized Chevrolet or
GMC Truck dealer for a fifteen month period. Settlement class
members do not have to trade in their current vehicle to use the
certificate, and the certificates can be used in conjunction with
GM and GMAC incentive programs.
The class members can freely transfer the certificate to
an immediate family member who resides with the class
member. Class members can also transfer the $1000 certificate
to a family member who does not reside with the class member
by designating the transferee family member within sixty days,
running from the date that GM mailed notice of the proposed
settlement. Additionally, the $1000 certificate can be
* GM reached a substantially identical agreement with counsel
representing a class of C/K pickup truck purchasers who are Texas residents
in Dollar v. General Motors, No. 92-1089 (71st Judicial District, Marshall,
Tex.(JA1708, 1746). That settlement was approved in November 1993, but
was overturned on appeal on June 22, 1994. See Bloyed v. General
MotorsCorporation, Dollar et al., 881 S.W. 422 (6th App. Dist., Tex. June
22,1994), discussed infra at VI(I). The Texas Supreme Court granted
GM’ sApplication for Wnt of Error on February 16, 1995 and set the case
for oral argument on March 21, 1995.
2la
transferred with the title to the settlement class vehicle, that is,
to a third party who purchases the class member’s vehicle.
In lieu of a $1,000 certificate, and without transferring
title to the settlement class vehicle, a class member may instead
request that a nontransferable $500 certificate
(counterintuitively known as the “transfer certificate”) be
issued to any third party except a GMC dealer or its affiliates.
This $500 certificate is redeemable with the purchase of a new
C or K series GMC or Chevrolet full-size pickup truck or its
replacement model. The $500 certificate cannot be used in
conjunction with any GMC or GMAC marketing incentive,
must be used on the more expensive full size models, and is
subject to the same fifteen-month redemption period as the
$1,000 certificates. The class member must make a notarized
request to GM, and GM will mail the $500 certificate to the
transferee within 14 days of its receipt of the request for
transfer.
Under the terms of the agreement, the approval of the
settlement and corresponding entry of final judgment would
have no effect upon any accrued or future claims for personal
injury or death, nor would it affect the rights of settlement class
members to participate in any future remedial action that might
be required under the National Traffic and Motor Safety Act of
1966, 15 U.S.C. §§ 1381 et seq. (1995).* (JA 1750, 1763-64.)
The settlement agreement before us also provides that
plaintiffs’ counsel would apply to the district court for an
award of reasonable attorneys’ fees and reimbursement of
* After oral argument in this case, United States Transportation Secretary
Federico Pena announced that NHTSA had settled the proceeding involving
the C/K trucks at issue here without ordering a recall, findingan acceptable
retrofit, or giving any compensation to the truck owners. The settlement
provided that GM would contribute $51 million to generalsafety programs
unrelated to the trucks’ alleged problems. See Statement by Secretary
Federico Pena on Dec. 2, 1994, Settlement Regarding DOT Investigation
of General Motors C/K Pickup Trucks.
‘
22a
expenses. both to be paid by GM. GM reserved the right to
object to any fees or expenses it deemed to be excessive and to
appeal any amount awarded by the court over its objection.
(JA 1750, 1755-56.) Plaintiffs’ counsel filed their fee
applications on or about September 15, 1993; the fee
applications remained in the files of the clerk of the district
court where class members could theoretically review them,
but no information about attorneys’ fees other than the fact that
a fee application would be made was included in the class
notice. GM did not file any formal objections to the fee
applications.
C. Approval of the Settlement and Fees
The district court reviewed the substantive terms of the
settlement on July 12, 1993 and made the preliminary
determination, in Pretrial Order No. 7, entered July 20, 1993,
that the proposed settlement appeared reasonable. (JA
1828-33.) | Also in pretrial order no. 7, the court
“provisionally” certified the class of GM truck owners as a
settlement class (i.e., for settlement purposes only) pursuant to
Rule 23(b)(3); however, the court did not make findings that
the requisites of Rule 23(a) or 23(b) were satisfied. (JA 1828-
33.) The court approved the form of and dissemination to
putative class members of the combined notice of the pendency
of the action and the proposed settlement pursuant to Rules
23(c)(2) and 23(e). The class definition included all persons
and entities who purchased in the United States (except for
residents of the State of Texas) and were owners as of July 19,
1993 of (1) a 1973-1986 model year General Motors full-size
pickup truck or chassis cab of the “C” or “K” series; or (2) a
1987-1991 model year General Motors full-size pickup truck
or chassis cab of the “R” or “V” series. (JA 1828.) On August
20 and 21, 1993, GM mailed the notice to all registered owners
of class vehicles (including nearly 5.7 million vehicles), and it
published the full text of the notice in USA Today and The
Philadelphia Inquirer on August 27, 1993.
23a
In response to the notice, over 5,200 truck owners
elected to opt out of the class, and approximately 6,500 truck
owners (a number which includes fleet owners who own as
many as 1,000 vehicles each) objected to the settlement. The
objectors’ filings contained many overlapping claims. The
recurring contentions were that: (1) the settlement does
nothing to fix the trucks (JA 1854,55,57); (2) even with the
$1,000 coupon, many owners would be unable to purchase a
new truck given their high cost (with list prices from $11,000
to $33,000); (3) state and local government fleet owners would
not be able to redeem all of their certificates (by buying new
vehicles) within the short redemption period (fifteen months),
and they might be further restricted from using the coupons by
competitive bidding procurement rules; and (4) GM and class
counsel colluded in a manner that compromised the interests of
the class and that would preclude a finding of adequate
representation. GM rejoined with voluminous material
emphasizing the substantial risks plaintiffs faced not only in
maintaining class treatment but also in establishing liability and
damages.
A settlement fairness hearing was held on October 26,
1993 during which the objectors who submitted written briefs
were permitted to speak. The district court approved the
settlement in a Memorandum and Order dated December 16,
1993. In that order, the court confirmed its Pretrial Order No.
7, which had provisionally certified the settlement class.
Although the court still made no findings that the requisites of
Rules 23(a) and (b) were met, it did set forth findings of fact
and conclusions of law to justify its approval of the settlement
as fair, reasonable and adequate based on the nine-factor test
established in Girsh v. Jepson, 521 F.2d 153 (3d Cir.1975).
The court found that the total economic value of the
settlement was “between $1.98 billion and $2.18 billion.”
(App. 1727). Against the prospect of settlement, the court
weighed each of the nine Girsh factors. It concluded that “the
complexity, expense and likely duration of the litigation would
24a
be mammoth.” (op. 6)JA 1708, 1713) Although the settlement
was reached at an early stage of the litigation, just four months
after the consolidated complaint was filed, the court found that
this did not weigh against the settlement because the court
believed that the parties had access to “extensive discovery on
the same issues of product defect that was previously
conducted in the various personal injury actions that have been
litigated throughout the country.” (op. 8-9)(JA1715-16) The
district court also found that the reaction of class members to
the proposed settlement supported approval citing “the
infinitesimal number of truck owners who have either objected
to or sought exclusion from the settlement.” (JA1715.)
Noting the divided results of the personal-injury jury
trials and the numerous defenses GM could raise, the court
found that “a substantial risk in establishing liability” weighed
in favor of approval. Similarly, the court found that “[p]erhaps
the greatest weakness in the plaintiffs’ case is the lack of proof
of economic damages.” (JA1721.) The court also addressed
the objection that the settlement did not provide for a recall or
a “fix,” explaining that “no objector that complains that the
settlement fails to retrofit the alleged defect has been able to
come forth with a practical and safe modification for the trucks
that has been designed, evaluated and tested.” (JA1736.)
On December 20, 1993, four days after approving the
settlement, the district court also approved the class counsel’s
request for attorneys’ fees in the amount of $9.5 million.
Although the court did not believe at that time that it needed to
review that fee award, to which GM had agreed, it
subsequently, on February 2, 1994, issued an “amplified order”
evaluating the award in greater detail. The court determined
that the fee request was reasonable under both a lodestar
analysis and the percentage-of-recovery method (see Part VII
infra ). (JA 1775.)
D. The NHTSA Investigation
While this case was under submission to this court, the
NHTSA investigation continued. Over the objections of some
ee ee ee ee ee
25a
of NHTSA’s engineers who had determined that the trucks
complied with relevant safety standards, on October 17, 1994,
Secretary of Transportation Federico Pena announced the
agency’s finding that the trucks contained a safety defect
creating an increased and unreasonable risk of side-impact
fires. The determination was based on the allegedly enhanced
risk of side-impact fires relative to Ford pickups that resulted
from GM’s placement of the fuel tanks outside the frame rails.
GM challenged the propriety of the public meeting NHTSA
planned to hold and NHTSA’s authority to order a recall of
vehicles that met all relevant safety standards. On December
2, 1994, Secretary Pena announced the settlement of the C/K _
pickup investigation wherein GM contributed over $51 million
for a variety of safety programs unrelated to the pickups, and
admitted no liability.’
E. Standard of Review
Each of the issues presented here is reviewable for
abuse of discretion. See Bryan v. Pittsburgh Plate Glass Co.,
494 F.2d 799 (3d Cir.), cert. denied, 419 U.S. 900, 95 S.Ct.
184, 42 L.Ed.2d 146 (1974) (approval of proposed class action
settlement); Jn re School Asbestos Litig., 921 F.2d 1338, 1341
(3d Cir.1990), cert. denied, 499 U.S. 976, 111 S.Ct. 1623, 113
L.Ed.2d 720 (1991) (class certification); Lindy Bros. Builders,
Inc. v. American Radiator & Standard Sanitary Corp., 540
F.2d 102, 115 (3d Cir.1976) (award of reasonable attorney’s
fees); Marrogquin Manriquez v. INS, 699 F.2d 129, 134 (3d
Cir.1983), cert. denied, 467 U.S. 1259, 104 S.Ct. 3553, 82
L.Ed.2d 855 (1984) (scope of discovery). An appeliate court
may find an abuse of discretion where the “district court’s
decision rests upon a clearly erroneous finding of fact, an errant
conclusion of law or an improper application of law to fact.”
International Union, UAW v. Mack Trucks, Inc., 820 F.2d 91,
95 (3d Cir. 1987); cert. denied, 499 U.S. 921, 111 S.Ct. 1313,
113 L.Ed.2d 246 (1991). A finding of fact is clearly erroneous
” See note 5 supra.
26a
when, although there is evidence to support it, the reviewing
court, based on the entire evidence, concludes with firm
conviction that a mistake has been made. Oberti v. Board of
Ed. of Borough of Clementon Sch. Dist., 995 F.2d 1204, 1220
(3d Cir.1993).
I. ANATOMY OF THE CLASS CLAIMS
The consolidated class complaint filed on behalf of the
nationwide class of GM truck owners (except those from
Texas) alleged violations of the Magnuson-Moss Warranty
Act, 15 U.S.C.A. § 2310(d)(1) (1995); and the Lanham Act, 15
U.S.C.A. § 1125(a) (1995); and a variety of state common law
and statutory claims, including strict liability in tort for selling
a dangerously defective product; negligent design; negligent
misrepresentation; fraud (based on defendants’ alleged course
of conduct in the advertising, promotion, and sale of the GM
pickups intentionally concealing material facts about a
dangerous latent defect); breach of warranty, including written
(from vehicle warranties), express (from public representations
by GM), implied (warranties of merchantability) and statutory
warranties, and finally violations of various state consumer
protection statutes. (JA37). The case did not involve any
pickup trucks that had actually experienced fuel tank fires
caused by side- impact collisions. Moreover, personal injury
or death claims were expressly omitted from the complaint as
well as from the settlement-class members remain free to
pursue such claims if any should accrue.
The aggregated treatment of these claims was
potentially complicated by the differences in underlying facts.
The trucks at issue had nineteen different fuel tank systems;
proof might thus be required for each design on relevant issues.
Furthermore, unlike the federal securities laws where there is
a presumption of reliance on a material misrepresentation, see
Basic v. Levinson, 485 U.S. 224, 108 S.Ct. 978, 99 L.Ed.2d 194
(1988), plaintiffs would likely have had to prove individual
reliance on the allegedly misleading materials under the
various state laws applicable to most of these claims. More
27a
fundamentally, the complaint itself invoked state laws that
implicated different legal standards on, for example, the
warranty claims (the laws contain various privity requirements
or the need for an allegedly defective product to fail in service
before a warranty claim can be sustained), negligent
misrepresentation, negligence, and strict products liability. The
state laws implicated by the filing of the nationwide class
action also differed on such issues as statutes of limitations,
whether pickup trucks are “consumer products;” the application
of durational limits on implied warranties; the requirement of
reliance to recover for fraud, misrepresentation, and warranty
claims; whether intent is a required element of negligent
misrepresentation claims; whether comparative fault is a
defense; and the relevant test for plaintiffs’ design defect
claims.
Ti RULE 23--RELEVANT FUNDAMENTAL
PRINCIPLES
Before turning to the precise questions at issue on this
appeal, it is important that we consider the several basic
purposes served by class actions in our contemporary, complex
litigation laden legal system. One of the paramount values in
this system is efficiency. Class certification enables courts to
treat common claims together, obviating the need for repeated
adjudications of the same issues. See Vol. 1 HERBERT
NEWBERG & ALBA CONTE, NEWBERG ON CLASS
ACTIONS § 1.06 (Third Ed.1992); General Tel. Co. v.
Falcon, 457 U.S. 147, 149, 102 S.Ct. 2364, --, 72 L.Ed.2d 740
(1982).
The Supreme Court has articulated other important
objectives served by class actions. Class actions achieve “the
protection of the defendant from inconsistent obligations, the
protection of the interests of absentees, the provision of a
convenient and economical means for disposing of similar
lawsuits, and the facilitation of the spreading of litigation costs
among numerous litigants with similar claims.” United States
Parole Comm'n v. Geraghty, 445 U.S. 388, 100 S.Ct. 1202, 63
28a
L.Ed.2d 479 pinpoint (1980). The Court has explained the
significance of the last goal as
an evolutionary response to the existence of injuries
unremedied by the regulatory action of government.
Where it is not economically feasible to obtain relief
within the traditional framework of a multiplicity of
small individual suits for damages, aggrieved persons
may be without any effective redress unless they may
employ the class-action device.
Deposit Guaranty National Bank v. Roper, 445 U.S. 326, 339,
100 S.Ct. 1166, ---, 63 L.Ed.2d 427 (1980); see also Vol 1
NEWBERG & CONTE § 1.06 at 1- 19. Cost spreading can
also enhance the means for private attorney general
enforcement and the resulting deterrence of wrongdoing. /d.
§ 1.06 at 1-18 to 120.
The law favors settlement, particularly in class actions
and other complex cases where substantial judicial resources
can be conserved by avoiding formal litigation. See
NEWBERG & CONTE § 11.41 at 11-85 (citing cases);
Cotton v. Hinton, 559 F .2d 1326, 1331 (Sth Cir.1977); Van
Brankhorst v. Safeco Corp., 529 F.2d 943, 950 (9th Cir.1976).
The parties may also gain significantly from avoiding the costs
and risks of a lengthy and complex trial. See First Com. Corp.
of Boston Customer Accts Litig ., 119 F.R.D. 301, 306-07 (D.
Mass. 1987). These economic gains multiply when settlement
also avoids the costs of litigating class status-often a complex
litigation within itself. Furthermore, a settlement may
represent the best method of distributing damage awards to
injured plaintiffs, especially where litigation would delay and
consume the available resources and where piecemeal
settlement could result, in the Rule 23(b)(1)(B) limited fund
context, in a sub-optimal distribution of the damage awards.
See, e.g., In re Dennis Greenman Securities Litig., 829 F.2d
1539, 1542 (11th Cir.1987).
Thus, courts should favor the use of devices that tend
to foster negotiated solutions to these actions. Prima facie, this
—
29a
would include settlement classes. True, it was once thought
that mass tort actions were ordinarily not appropriate for class
treatment, see Fed.R.Civ.P. 23 Advisory Committee’s note,
subdivision (b)(3), 39 F.R.D. 69, 103 (1966). It has also been
argued that mass tort cases strain the boundaries of Rule 23.
See Bruce H. Nielson, Was the 1966 Advisory Committee
Right?: Suggested Revisions of Rule 23 to Allow More
Frequent Use of Class Actions. in Mass Tort Litigation,
25 HARV. J. LEGIS. 461 (1988) (suggesting necessity of rule
revisions to accommodate class action treatment of mass torts).
However, the applicability of Rule 23 to mass tort cases has
become commonplace, and the use of the class action device,
specifically the (b)(3) class, has created some of the largest and
most innovative settlements in these contexts. Prominent
examples include the recent $4.2 billion settlement of the
breast implant litigation. See In re Silicone Gel Breast Implant
Prods. Liability Litig., 1994 WL 578353 (N.D.Ala. 1994).
Despite the potential benefits of class actions, there
remains an overarching concern-that absentees’ interests are
being resolved and quite possibly bound by the operation of res
judicata even though most of the plaintiffs are not the real
parties to the suit. The protection of the absentees’ due process
rights depends in part on the extent the named plaintiffs are
adequately interested to monitor the attorneys (who are, o
course, presumed motivated to achieve maximum results by the
prospect of substantial fees), and also on the extent that the
class representatives have interests that are sufficiently aligned
with the absentees to assure that the monitoring serves the
interests of the class as a whole. In addition, the court plays
the important role of protector of the absentees’ interests, in a
sort of fiduciary capacity, by approving appropriate
representative plaintiffs and class counsel.
Another problem is that class actions create the
Opportunity for a kind of legalized blackmail: a greedy and
unscrupulous plaintiff might use the threat of a large class
action, which can be costly to the defendant, to extract a
settlement far in excess of the individual claims’ actual worth.
Because absentees are not parties to the action in any real
sense, and probably would not have brought their claims
individually, see Mars Steel v. Continental Illinois National
Bank & Trust, 834 F.2d 677, 678 (7th Cir. 1987), attorneys or
plaintiffs can abuse the suit nominally brought in the absentees’
names. As one court has noted, “[t]his fundamental departure
from the traditional pattern in Anglo-American litigation
generates a host of problems....” /d.
The drafters designed the procedural requirements of
Rule 23, especially the requisites of subsection (a), so that the
court can assure, to the greatest extent possible, that the actions
are prosecuted on behalf of the actual class members in a way
that makes it fair to bind their interests. The rule thus
represents a measured response to the issues of how the due
process rights of absentee interests can be protected and how
absentees’ represented status can be reconciled with a litigation
system premised on traditional bipolar litigation. Moreover,
the requirement in Rule 23(c) that the court decide certification
motions “as soon as practicable,” see note 1 supra, aims to
reduce even further the possibility that a party could use the
ill-founded threat of a class action to control negotiations or the
possibility that absentees’ interests could be unfairly bound.
Hence, the procedural formalities of certification are important
even if the case appears to be headed for settlement rather than
litigation.
This expanded role of the court in class actions (relative
to conventional bipolar litigation) continues even after
certification. While the parties in a normal suit do not
ordinarily require a judge’s approval to settle the action, class
action parties do. Rule 23(e) provides: “A class action shall
not be dismissed or compromised without the approval of the
court, and notice of the proposed dismissal or compromise
shall be given to all members of the class in such manner as the
court directs.” FED. R. CIV. P. 23 (EB). ‘Courts and
commentators have interpreted this rule to require courts to
3la
“independently and objectively analyze the evidence and
circumstances before it in order to determine whether the
settlement is in the best interest of those whose claims will be
extinguished.” 2 NEWBERG & CONTE § 11.41 at 11-88 to
11-89. “Under Rule 23(e) the district court acts as a fiduciary
who must serve as a guardian of the rights of absent class
members.... [T]he court cannot accept a settlement that the
Proponents have not shown to be fair, reasonable and
adequate.” Gr: ‘nv. International House of Pancakes, 513
F.2d 114, 123( 4 Cir.) cert. denied. 423 US. 864, 96 S.Ct.
124, 46 L.Ed.7d 1975); Malchman v. Davis, 706 F.2d 426,
433 (2d Cir.1' Sala v. National RR Passenger Corp.,
721 F. Supp. 80(. ».Pa.1989); see also Piambino v. Bailey,
610 F.2d 1306 (Sth Cir.), cert denied 449 U.S. 101 1, 101 S.Ct.
568, 66 L.Ed.2d 469 (1980).
Before sending notice of the settlement to the class, the
court will usually approve the settlement preliminarily. This
preliminary determination establishes an initial presumption of
fairness when the court finds that: (1) the negotiations
occurred at arm’s length; (2) there was sufficient discovery;
(3) the proponents of the settlement are experienced in similar
litigation; and (4) only a small fraction of the class objected.
See 2 NEWBERG & CONTE § 11.41 at 11-91.
As noted above, this court has adopted a nine-factor test
to help district courts structure their final decisions to approve
settlements as fair, reasonable, and adequate as required by
Rule 23(e). See Girsh v. Jepson, 521 F.2d 153, 157 (3d Cir.
1975). Those factors are: (1) the complexity and duration of
the litigation; (2) the reaction of the class to the settlement; (3)
the stage of the proceedings; (4) the risks of establishing
liability; (5) the risks of establishing damages; (6) the risks of
maintaining a class action; (7) the ability of the defendants to
withstand a greater judgment; (8) the range of reasonableness
of the settlement in light of the best recovery; and (9) the range
of reasonableness of the settlement in light of all the attendant
risks of litigation. Jd. The proponents of the settlement bear the
32a
burden of proving that these factors weigh in favor of approval.
See GM Interchange, 594 F.2d 1106, 1126 n. 30 7th Cir. 1979);
Holden v. Burlington Northern, Inc., 665 F. Supp. 1398, 1407
(D. Minn. 1987); MCL 2d § 30.44. The findings required by
the Girsh test are factual, see Malchman v. Davis, 706 F.2d at
434; Plummer v.. Chemical Bank, 668 F.2d 564, 659 (2d
Cir.1982), which will be upheld unless they are clearly
erroneous, Weinberger v. Kendrick, 698 F.2d 61, 7? (2d
Cir. 1982), cert. denied, 464 U.S. 818 (1983); Jn re Corrugated
Container Antitrust Litig., 643 F.2d 195, 207 (Sth Cir.1981).
IV. SETTLEMENT CLASSES
This appeal challenges (among other things) the district
court’s class certification order. Before we may address the
propriety of the court’s order we must first decide whether it is
ever proper to certify a class for settlement purposes only. We
therefore begin our analysis with a closer look at how
settlement classes operate.
A. Nature of the Device
As we have explained above, a settlement class is a
device whereby the court postpones the formal certification
procedure until the parties have successfully negotiated a
settlement, thus allowing a defendant to explore settlement
without conceding any of its arguments against certification.
Despite the directive of Rule 23(c) that courts certify actions as
soon as practicable, when a class action has been filed before
the settlement has been arrived at courts will often delay the
certification determination during the pendency of settlement
discussions. If the settlement negotiations succeed, courts will
certify the class for settlement purposes only and send a
combined notice of class pendency and settlements to the class
members. Thus, dy the time the court considers certification,
the defendant has essentially stipulated to the existence of the
class requirements since it now has an interest in binding an
entire class with its proffered settlement.
a ee eae! ae ee ee ee ove ncesias epbee
Seca ten bo Me em Pe eee eee
33a
By specifying certification for settlement purposes only,
however, the court preserves the defendant’s ability to contest
certification should the settlement fall apart. Because the court
indulges the assumption of the class’s existence only until a
settlement is reached or the parties abandon the negotiations,
settlement classes are also sometimes referred to as temporary
or provisional classes. Sometimes the specification may also
be seen as assuming that the class may only meet the
requirements of Rule 23 if the action is settled, and that
certification may in fact be inappropriate if the action will
actually be litigated. In any event, notwithstanding that there
is an absence of clear textual authorization for settlement
classes, many courts have indulged the stipulations of parties
by establishing temporary classes for settlement purposes only.
See, e.g., Mars Steel v. Continental Illinois Nat'l Bk. & Trust,
834 F.2d 677 (7th Cir.1987); Weinberger v. Kendrick, 698
F.2d 61 (2d Cir. 1982), cert. denied, 464 U.S. 818 (1983); Jn
re A.H. Robins Co., 880 F.2d 709, 738-39 (4th Cir. 1989); In
re Dennis Greeman Sec. Litig., 829 F.2d 1539, 1543 (11th Cir.
1978); Plummer v. Chemical Bank, 668 F.2d 564 (2d Cir.
1982); In re Beef Industry Antitrust Litig., 607 F.2d 167, 173
(Sth Cir. 1979); Malchman v. Davis, 706 F.2d 427, 433-34 (2d
Cir. 1983); In re Taxable Mun. Bond Sec. Litig., 1994 WL
643142 (E.D. La. Nov. 15, 1994); Jn re Silicone Gel Breast
Implant Prod. Liab. Litig., 1994 WL 578353 (N.D. Ala. Sept.
1, 1994); In re First Commodity Corp. of Boston, 119 F.R.D.
301, 306-08 (D. Mass. 1987); In re Bendectin, 102 F.R.D. 239,
240 (S.D. Oh. 1984), rev'd on other grounds, 749 F.2d 300
(6th Cir. 1984); In re Mid-Atlantic Toyota Anti-trust Litig., 564
F. Supp. 1379, 1388-90 (D. Md. 1983); Jn re Chicken Antitrust
Litig ., 560 F. Supp. 957, 960 (N.D. Ga. 1980).
There has been a great deal of commentary, both
critical® and laudatory,’ of the use of these “settlement classes.”
* See, e.g., John C. Coffee, Jr., The Corruption of the Class Action, WALL
(continued...)
ee
34a
\
And some courts have criticized these accommodations of the
negotiating parties and expressed their ambivalence while
continuing nonetheless to use them. See, e.g., Mars Steel, 834
F .2d 677 (7th Cir. 1987) (describing considerable dangers of
settlement classes but ultimately upholding the settlement).
Before we interpret the dictates of Rule 23 with respect to
settlement classes, it will be useful to survey both the criticism
and the praise.
B. Perceived Problems of Settlement Classes
A number of commentators, particularly the authors of
the first edition of the Manual for Complex Litigation, have
voiced serious concerns about settlement classes. These
criticisms have focused on the fact that Rule 23, a carefully
constructed scheme intended to protect the rights of absentees
that necessarily relies on active judicial participation to protect
those interests, does not authorize a separate category of class
certification that would permit a dilution of or dispense with
the subsection (a) criteria. § .46; see also Mars Steel v.
Continental Ill. Nat’l Bank & Trust, 834 F.2d 677, 680 (7th
Cir. 1987); In re Baldwin United, 105 F.R.D. 475 (S.D.N_Y.
1984). Other criticisms focus on the potential prejudice to the
parties and the institutional threat posed to the court. See, e.g.,
' Coffee, supra note 10.
Rule 23 does not in terms authorize the deferral of class
certification pending settlement discussions. Indeed,
Rule 23(c) provides: “As soon as practicable after the
commencement of an action brought as a class action, the court
shall determine by order whether it is to be so maintained.”
* (...continued)
ST. J. Sept. 7, 1994, at AIS.
* 2 Newberg & Conte § 11.27 (First) § 1.46; Roger H. Transgrud, Joinder
Alternatives in Mass Tort Litigation, 70 CORNELL L. REV. 779(1985);
Bruce H. Nielson, Was the 1966 Advisory Committee Right?:Suggested
Revisions of Rv'e 23 to Allow More Frequent Use of Class Actionsin Mass
Tort Litigation, 25 HARV. J. LEGIS. 461, 480
35a
Fed. R. Civ. P. 23(a) (emphasis supplied). Deliberately
delaying a class certification determination so that settlement
discussions can proceed clearly does not represent an effort to
resolve the issue “as soon as practicable.” As Judge Posner has
noted, “[i]t is hard to see why the propriety of maintaining the
suit as a class action could not ‘practicably’ have been
determined much earlier. And, common though the practice of
deferring class certification while settlement negotiations are
going on is, it not only jostles uneasily with the language of
Rule 23(c)(1) but also creates practical problems.” Mars Steel,
834 F.2d at 680.
The danger here is that the court cannot properly
discharge its duty to protect the interests of the absentees
during the disposition of the action. Because the class has not
yet been defined, the court lacks the information necessary to
determine the identity of the absentees and the likely extent of
liability, damages, and expenses of preparing for trial. See
MCL 2d § 30.45 at 243 (“No one may know how many
members are in the class, how large their potential claims are,
what the strengths and weaknesses of the parties’ positions are,
or how much the class will benefit under the settlement.”); Jn
re Baldwin United, 105 F.R.D. 475, 481 (S.D.N.Y. 1984).
Moreover, the court performs its role as supervisor/protector
without the benefit of a full adversarial briefing on the
certification issues. With less information about the class, the
judge cannot as effectively monitor for collusion, individual
settlements, buy-offs (where some individuals use the class
action device to benefit themselves at the expense of
absentees), and other abuses. See In re Beef Indus. Antitrust
Litig., 607 F.2d at 174. For example, if the court fails to define
the class before settlement negotiations commence, then during
the settlement approval phase the judge will have greater
difficulty detecting if the parties improperly manipulated the
scope of the class in order to buy the defendant’s acquiescence.
Settlement classes also make it more difficult for a
court to evaluate the settlement by depriving the judge of the
36a
customary structural devices of Rule 23 and the presumptions
of propriety that they generate. Ordinarily, a court relies on
class status, particularly the adequacy of representation
required to maintain it, to infer that the settlement was the
product of arm’s length negotiations. Cf Weinberger v.
Kendrick, 698 F.2d 61, 74 (2d Cir. 1983) (noting protracted
nature of negotiations in approving settlement); City of Detroit
v. Grinnell, 495 F.2d 448, 463 (2d Cir. 1974) (same); Jn re
Baldwin-United, 105 F.R.D. 475, 482 (S.D.N.Y. 1984) (same).
Where the court has not yet certified a class or named its
representative or counsel, this assumption is questionable.
In effect, settlement classes can, depending how they
are used, evade the processes intended to protect the rights of
absentees. Indeed, the draft of the MCL § (Third), although
considerably more receptive to settlement classes than the
earlier editions of the Manual, explains that “[t]he problem
presented by these requests is not the lack of sufficient
information and scrutiny, but rather the possibility that
fiduciary responsibilities of class counsel or class
representatives may have been compromised.” MCL (Third)
(draft) at 193. Even some courts successfully using these
devices to achieve settlements apparently recognize these
dangers since they certify these actions more cautiously than
ordinary classes. See, e.g., Ace Heating & Plumbing Co. v.
Crane Co., 453 F.2d 30, 33 (3d Cir. 1971) (court must be
doubly careful where negotiation occurs before certification
and designation of a class counsel); /n re Beef Antitrust Litig.,
607 F.2d 167, 176-77 (Sth Cir. 1979) (examining though
ultimately rejecting the charge that collusion precluded the
certification of the settlement class); Simer v. Rios, 661 F.2d
655, 664-66 (7th Cir. 1981) (requiring a higher showing of
fairness where settlement negotiated prior to certification);
Weinberger v. Kendrick, 698 F.2d 61, 69 (2d Cir. 1982) (judge
made findings about discovery and counsel).
In particular, settlement classes create especially
lucrative opportunities for putative class attorneys to generate
4
POF
= AMEE A EC EOS NC A NE ik A EOE TET IT errr ee
37a
fees for themselves without any effective monitoring by class
members who have not yet been apprised of the pendency of
the action. Moreover, because the court does not appoint a
class counsel until the case is certified, attorneys jockeying for
position might attempt to cut a deal with the defendants by
underselling the plaintiffs’ claims relative to other attorneys. '°
Unauthorized settlement negotiations occurring before the
certification determination thus “create the possibility of
negotiation from a position of weakness by the attorney who
purports to represent the class.” GM Interchange Litigation,
594 F.2d 1106, 1125 (7th Cir. 1979). Pre-certification
negotiations also hamper a court’s ability to review the true
value of the settlement or the legal services after the fact. See
supra at 36. In addition, unauthorized negotiations also result
in denying other plaintiffs’ counsel information that is
necessary for them to make an effective evaluation of the
fairness of any settlement that results. See GM Interchange,
594 F.2d at 1125.
Framed as an issue of Rule 23(a) requisites, these
considerations implicate adequacy of representation concerns:
“[a]rguments in opposition to settlement classes have merit
when they are addressed to the problem of inadequate
representation or possible collusion among the named plaintiffs
and some or all defendants.” Jn re Baldwin-United Corp.,
105 F.R.D. 475, 480 (S.D.N_Y. 1984). Another court has
warned that the “danger of a premature, even a collusive,
settlement [is] increased when as in this case the status of the
action as a class action is not determined until a settlement has
been negotiated, with all the momentum that a settlement
agreement generates....”; Mars Steel, 834 F.2d at 680; see also
Malchman, 706 F.2d at 433 (recognizing special potential for
collusion or undue pressure by defendants in settlement ’
"* These sorts of dynamics have led some critics to accuse class action
attorneys of ethical violations. While we emphasize that counsel here
committed no such violations, we do not preclude the possibility that these
violations could occur.
38a
negotiations); Weinberger, 698 F.2d at 73 (requiring a higher
showing of fairness to accommodate greater potential for
improper settlement). Settlement classes, which constitute ad
hoc adjustments to the carefully designed class action
framework constructed by Rule 23, lack the regulatory
mechanisms that ordinarily check this improper behavior:
“There is in fact little or no individual client consultation and
no judicial oversight of a hidden process of wheeling and
dealing to maximize overall recovery and fees for hundreds and
thousands of massed cases .” Jn re Joint Eastern & Southern
District Asbestos Litigation, 129 B.R. 710, 802 (E & $.D.N_Y.
1991) (discussing the ramifications of class treatment of mass
torts).
In addition to these procedural problems (and the
problems created for a judge trying to evaluate both class status
and the adequacy of a class settlement simultaneously) the
earlier achievement of settlement through the use of a
settlement class also can lead to a settlement that may provide
inadequate consideration in exchange for the release of the
class’s claims. With early settlement, both parties have less
information on the merits. That is, they have less information
on the membership of the class, on the size of potential claims,
on whether the settlement purports to resolve class or
individual claims, on the strengths and weaknesses of the case,
and on how class members will benefit from the settlement.
See MCL § 2d § 30.45 at 243-44; 2 NEWBERG & CONTE
§ 11.09 at 11-13. Without the benefit of more extensive
discovery, both sides may underestimate the strength of the
plaintiffs’ claims.
Turning to the question of due process rights, we note
that class members may, as a result of these information
deficiencies, not be in a fair position at this early stage to
evaluate whether or not the settlement represents a superior
alternative to litigating. Perhaps more troubling in light of the
reality that absentees tend to lack-a real understanding of the
actions supposedly pursued in their names is that, “where
39a
notice of the class action is ... sent simultaneously with the
notice of the settlement itself, [the settlement class paradigm],
the class members are presented with what looks like a fait
accompli.” Mars Steel, 834 F.2d at 680-81. Thus, even if they
have enough information to conclude the settlement is
insufficient and unsatisfactory, see In re Beef Antitrust Litig.,
607 F.2d 167, 173 n. 4 (Sth Cir. 1979), cert. denied, 452 US.
905, 101 S.Ct. 3029, 69 L.Ed.2d 405 (1981), the mere
presentation of the settlement notice with the class notice may
pressure even skeptical class members to accept the settlement
out of the belief that, unless they are willing to litigate their
claims individually--often economically infeasible--they really
have no choice.
In a different vein, a number of cases have also
criticized settlement classes on the grounds that they create an
opportunity for “one-way intervention,” allowing putative class
members to wait to see whether they think the settlement is
favorable before deciding whether they want to be bound by it.
See McDonald v. Chicago Milwaukee Corp., 565 F.2d 416, 420
(7th Cir.1977); Watkins v. Blinzinger, 789 F.2d 474, 475 n. 3
(7th Cir. 1986) (“A deferred ruling [on certification] converts
the class action to an opportunity for one- way intervention,
which Rule 23 is designed to avoid....”); Premier Electrical
Constr. Co. v. National Electrical Contractors Ass'n, Inc.,
814 F.2d 358, 363 (7th Cir.1987) (criticizing delay of
certification). Because class members have the opportunity to
wait until the outcome is known (i.e ., the settlement’s terms
are determined) to decide whether they want to be bound by the
result, courts and defendants are exposed to the same potential
for multiple lawsuits that class actions are designed to avoid,
and the supposed advantages of settlement classes are largely
eroded.
Perhaps more troubling, the possibility of
precertification negotiation and settlement may facilitate the
filing of strike suits. Since settlement classes can involve a
settlement achieved either before or after the filing of class
40a
claims, recognition of the settlement class device allows
plaintiffs to file as class actions cases that counsel never
intended to have certified, but instead only to settle the claims
individually. Mars Steel, 834 F.2d 677, 681 (7th Cir. 1984)
(“[Plaintiffs will be tempted to add class claims in order to
intimidate the defendant, then delete them by way of
compromise.”). Knowing that they would not face judicial
scrutiny if they settle before certification, plaintiffs’ lawyers
face no deterrent from attempting to extract larger settlements
by threatening class litigation than they could with the cases
filed individually.
In many respects then, the failings of settlement classes
are a function of the dearth of information available to judges
attempting to scrutinize the settlements in accordance with
their Rule 23(e) duties. Because the issue of certification is
never actively contested, the judge never receives the benefit
of the adversarial process-that provides the information needed
to review propriety of the class and the adequacy of settlement.
This problem is exacerbated where the parties agree on a
settlement of the case before the class action is filed, since a
motion for certification and settlement are presented
simultaneously.
Last, but by no means least, the use of settlement
classes also risks transforming the courts into mediation
forums. See Coffee, supra note 9 at A15. Cases could be filed
without any expectation or intention of litigation, with the
foreknowledge that the natural hydraulic pressure for
settlement may in fact lead to a class settlement, especially
given the incentive a defendant has to bind as many potential
claimants as possible with an approved class settlement.
Courts may approve these class settlements even if the case is
highly inappropriate for class treatment, since judges
confronting the reality of already over-taxed judicial resources,
see Proposed Long Range Plan for the Federal Courts (March
1995) at 9-12, may feel constrained to dispose of such onerous
litigation through the settlement class device. The losers in this
4la
type of scenario are not only inadequately represented class
members but also the federal courts as an institution, because
their resources are further sapped by entertaining cases that
arguably do not belong there." This increased burden will be
especially problematic if the standards for certification are
relaxed for settlement classes; as this appeal demonstrates,
proceedings attendant to settlement class certification can
consume considerable federal judicial time.
C. Arguments Favoring Settlement Classes
Although settlement classes are vulnerable to potent
criticisms, some important dynamics militate in favor of a
judge’s delaying or even substantially avoiding class
certification determinations. Because certification so
dramatically increases the potential value of the suit to the
plaintiffs and their attorneys as well as the potential liability of
the defendant, the parties will frequently contest certification
vigorously. As a result, a defendant considering a settlement
may resist agreeing to class certification because, if the
settlement negotiations should fail, it would be left exposed to
major litigation. See In re Beef Indus. Antitrust Litig., 607 F.2d
167, 177-78 (Sth Cir. 1979) (“[A blanket rule against
settlement classes] may render it virtually impossible for the
parties to compromise class issues and reach a proposed class
settlement before a class certification....”); In re Baldwin
United, 105 F.R.D. 475 (S.D.N.Y. 1984).
In mass tort cases, in particular, use of a settlement
class can help overcome certain elements of these actions that
otherwise can considerably complicate efforts to settle. These
hurdles include “the large number of individual plaintiffs and
lawyers, ...the existence of unfiled claims by putative
plaintiffs; and ...the inability of any single plaintiff to offer the
"' Because the parties do not come before the court until the action has
settled, some courts have even expressed concern that such cases do not
Present a@ case or controversy for Article III purposes. Cf Carlough v.
Amchem Products, Inc., 834 F ‘Supp. 1437, 1462-67 (E.D.Pa.1993).
42a
settling defendant reliable indemnity protection....” Transgrud,
70 CORNELL L. REV. at 835. By using the courts to
overcome some of the collective action problems particularly
acute in mass tort cases, the settlement class device can make
settlement feasible. The use of settlement classes can thus
enable both parties to realize substantial savings in litigation
expenses by compromising the action before formal
certification. See 2 NEWBERG & CONTE § 11.09 at 11-13.
Through settlement class certification, courts have fostered
settlement of some very large, complex cases that might
otherwise never have yielded deserving plaintiffs any
substantial renumeration.
Settlement classes also increase the number of 2ctions
that are amenable to settlement by increasing the rewards of a
negotiated solution, in at least four ways. First, the prospect of
class certification increases a defendant’s incentive to settle
because the settlement would then bind the class members and
prevent further suits against the defendant. Second, settlement
classes may reduce litigation costs by allowing defendants to
stipulate to class certification without forfeiting any of their
legal arguments against certification should the negotiations
fail. Third, because the payment of settlement proceeds, even
relatively small amounts, may palliate class members,
settlement can reduce differences among class members, and
thus make class certification more likely, increasing the value
of settlement to the defendant, since a larger number of
potential claims can thus be resolved.
Fourth, the use of settlement classes reduces the
probability of a successful subsequent challenge to the
class-wide settlement. By treating the class as valid pending
settlement, a temporary class facilitates notice to those persons
whom the court might consider part of the class. The expanded
notice afforded by access to the customary class action
notification process protects both the absentees and the
defendants by eliminating negotiations between the defendants
and the named plaintiffs with respect to the class definition that
43a
could leave the defendant vulnerable to additional suits by
absentees whose interests, a court later determines, were not
adequately served or protected. 2 NEWBERG & CONTE
§ 11.27 at 11-40 (citing Midland Mut. Life Ins. Co. v. Sellers,
101 B.R. 921 (Bankr.S.D. Ohio 1989)). Increasing the
certainty that the settlement will be upheld augments the value
of settling to the defendant and consequently the amount
defendants will be willing to pay.. Thus, delaying certification,
in contravention of a strict reading of Rule 23, encourages
settlement, an important judicial policy, by increasing the
prospective gains to the defendant (and thus potentially to the
plaintiffs as well) from exploring a negotiated solution.
Moreover, critics of settlement classes may
underestimate the safeguards that still inhere. Although courts
are often certifying settlement classes with sub-optimal
amounts of information, and without the full benefit of the
processes meant to protect the absentees’ interests, the
provisional certification of a settlement class does not finally
determine the absentees’ rights. When the simultaneous notice
of the class and the settlement is distributed to the proposed
Class, objecting class members can still challenge the class on
commonality, typicality, adequacy of representation,
superiority, and predominance grounds--they are not limited to
objections based strictly on the settlement’s terms.
2 NEWBERG & CONTE § 11.27 at 11-40 (citing Midland
Mut. Life Ins. Co. v. Sellers, 101 B.R. at 921).
Furthermore, the view that, in settlement class cases,
the court lacks the information necessary to fufill its role as
protector of the absentees, may reflect an assumption that the
court’s approval always comes early in the case. See
2 NEWBERG & CONTE § 11.27 at 11-43 to 11-44. While it
often does, the certification decision is sometimes made later
in the case, when the parties have presumably developed the
merits more fully (in discovery or in the course of wrangling
over the settlement terms) and when prior governmental
procedures or investigations might have also yielded helpful
44a
information. Id. Whatever the timing of the certification ruling,
the judge has the duty of passing on the fairness and adequacy
of the settlement under Rule 23(e) and also of determining
whether the class meets the Rule’s requisites under 23(a).’”
Whether or not the court certifies the class before settlement
discussions, these duties are the same. 2 NEWBERG &
CONTE § 11.27, at 11-46.
Although a judge cannot presume that the putative class
counsel actively represented the absentees’ interests, the court
can still monitor the negotiation process itself to assure that
both counsel and the settlement adequately vindicate the
absentees’ interests. Thus, there is no reason to inflexibly limit
the use of settlement classes to any specified categories of
cases (for example, those cases with few objectors, those which
do not involve partial settlements,’ or those which do not
involve an expanded class). Even apparently troublesome
litigation activity, such as expanding the class just before
settlement approval at the defendant’s request, is no more free
from judicial scrutiny in a settlement class context than it
would be otherwise. The court still must give notice to the
now-expanded class and satisfy itself that the requisites of class
certification are met. /d. at 11- 49. Since the party advocating
certification bears the burden of proving appropriateness of
class treatment, David v. Romney, 490 F.2d 1360 (3d Cir.
1974), where the procedural posture is such that the court lacks
adequate information to make those determinations, it can and
should withhold the relevant approvals. 2 NEWBERG &
CONTE § 11.27 at 11-46.
2 We are somewhat dubious of the court’s ability to discharge itsduties
completely under these circumstances. See Part IVE infra.
MCL 2d expressed concern about partial settlements (settlements only
as to certain plaintiffs or certain defendants) since “[m]embers of the
settlement class will almost certainly find it difficult to understand their
position in the litigation.” MCL 2d § 30.45.
45a
But even if the use of settlement classes did reduce a
judge’s capacity to safeguard the class’s interests, it does not
necessarily impair the ability of absentees to protect their own
interests. Individual class members retain the right to opt out
of the class and settlement, preserving the right to pursue their
own litigation. See Premier Elec. Const. Co. v. NE. C.A., Inc.,
814 F.2d 358 (7th Cir. 1987) (criticizing settlement classes
because they create opportunities for one-way intervention).
In fact, the use of the settlement class in some sense enhances
plaintiffs’ right to opt out. Since the plaintiff is offered the
Opportunity to opt out of the class simultaneously with the
Opportunity to accept or reject the settlement offer, which is
supposed to be accompanied by all information on settlement,
the plaintiff knows exactly what result he or she sacrifices
when opting out. See 2 NEWBERG & CONTE § 11.27
at 11-51. See In re Beef Industry Antitrust Litigation, 607 F.2d
at 174.
In sum, settlement classes Clearly offer substantial
benefits. However, the very flexibility required to achieve
these gains strains the bounds of Rule 23 and comes at the
expense of some of the protections the Rule-writers intended
to construct. As Judge Schwarzer has explained:
one way to see [the settlement class] is as a
commendable example of the law’s adaptability to meet
the needs of the time-in the best tradition of the
Anglo-American common law. But another
interpretation might be that it is an unprincipled
subversion of the Federal Rules of Civil Procedure.
True, if it is a subversion, it is done with good
intentions to help courts cope with burgeoning dockets,
to enable claimants at the end of the line of litigants to
recover compensation, and to allow defendants to
manage the staggering liabilities many face. But as
experience seems to show, good intentions are not
always enough to ensure that all relevant private and
public interests are protected. The siren song of
46a
Rule 23 can lead lawyers, parties and courts into rough
waters where their ethical compass offers only
uncertain guidance.
William W. Schwarzer, Settlement of Mass Tort Class Actions:
Order Out of Chaos, CORNELL L. REV. (forthcoming).
D. Are Settlement Classes Cognizable Under
Rule 23?
Although not specifically authorized by Rule 23,
settlement classes are not specifically precluded by it either;
indeed, Judge Brieant has read subsection (d), giving the court
power to manage the class action, as authorizing the creation
of “tentative”, “provisional”, or “conditional” classes through
its grant of power to modify or decertify classes as necessary.
See, e.g., In re Baldwin-United Corp., 105 F.R.D. 475, 478-79
(S .D.N.Y.1984). And because of the broad grant of authority
in Rule 23(d), at least one commentator has noted that the
validity of temporary settlement classes is usually not
questioned. 2 NEWBERG & CONTE § 11.22 at 11-31.
Courts apparently share this confidence. Indeed, one court
believed that “[ijt is clear that the Court may provisionally
certify the Class for settlement purposes.” South Carolina
Nat’l Bank v. Stone, 749 F. Supp. 1419, (D.S.C.1990).
We believe that the “provisional”'* or “conditional”'*
conception of the settlement class device finds at least a
colorable textual basis in the Rule. Rule 23(d) enables a court
to certify a class, if it complies with its duty to assure that the
class meets the rule’s requisites by making appropriate Rule 23
‘The terms “tentative” and “provisional” appear to be
usedinterchangeably.
'S “Conditional” is actually a term that can be properly applied to all class
actions, even those that are certified in the normal process. Under
Rule 23(c)(1), the court retains the authority to re-define or decertify the
class until the entry of final judgment on the merits. This capacity renders
all certification orders conditional until the entry of judgment. See MCL
§ 2d § 30.18.
47a
findings (see Part IV(E) infra). Some courts appear to have
concluded that the built-in flexibility of the Rule, which
enables the court to revisit the requisites and modify or
decertify the class should its nature change dramatically during
the negotiation process, renders it acceptable to determine class
Status after settlement and thus avoid scrutinizing and
adjudicating class status at an earlier stage when the outcome
is unknown. See, e.g., In re Baldwin-United, 105 F.R.D.
at 483; In re Beef Antitrust Litig., 607 F.2d at 177 (“[T]he
Court finds that a conditional class should be certified for the
purpose of considering the proposed settlements.”)
Alternatively, some courts have conceived of settlement
classes as a “temporary assumption” by the court to facilitate
settlement. See Mars Steel, 834 F.2d at 680: In re Beef Indust.
Antitrust Litig., 607 F.2d at 177; 2 NEWBERG & CONTE
§ 11.27 at 1150. The arguments of the late Herbert Newberg,
one of the leading advocates of settlement classes, reflect an
assumption that the Rule 23 determinations are merely
postponed, not eliminated:
On analysis, however, it would appear that this
argument [that courts using settlement classes
circumvent the need to test the propriety of the class
action according to the specific criteria of Rule 23] may
be rebutted by perceiving the temporary settlement
class as nothing more than a tentative assumption
indulged in by the court... The actual class ruling is
deferred in these circumstances until after hearing on
the settlement approval... At that time, the court in fact
applies the class action requirements to determine
whether the action should be maintained as a class
action...
48a
2 NEWBERG & CONTE § 11.27 at 11-50." Newberg posits,
therefore, that the temporary assumption conception of the
settlement needs no special authorization since the court
eventually follows the ordinary certification process, only
deferring it until the settlement approval stage.
Courts have also relied on the more general policies of
Rule 23--promoting justice and realizing judicial efficiencies--
to justify this arguable departure from the rule.
[T]he hallmark of Rule 23 is flexibility.... Temporary
settlement classes have proved to be quite useful in
resolving major class action disputes. While their use
may still be controversial, most Courts have recognized
their utility and have authorized the parties to
compromise their differences, including class action
issues through this means.
Weinberger, 698 F.2d at 72-73. One commentator found
implicit authorization for settlement classes under a
settlement-oriented interpetation of Rule 23:
[Rule 23] provides that a court may certify a common
question class action when it will prove “superior to
other available methods for the fair and efficient
adjudication of the controversy.” A _ judicially
supervised and approved class action settlement, like a
judicially supervised trial, is a means of hearing and
determining judicially, in other words “adjudicating,”
the value of claims arising from a mass tort. As a
result, if conditional certification of the case as a
common question class action for settlement purposes
*® See also In re Mid-Atlantic Toyota Antitrust Litig., 564 F.Supp.1379,
1388 n. 13 ©. Md. 1983) (“Completely ancillary to the proposed settlement,
[a temporary settlement class] lasts only as long as the period between the
preliminary approval of the settlement and the court’s final determination
on the settlement. In effect, a temporary settlement class serves only as a
procedural vehicle for providing notice to putative members of a proposed
class....””).
49a
would enhance the prospects for a group settlement,
then Rule 23 authorizes certification.
Roger H. Transgrud, Joinder Alternatives in Mass Tort Litig.,
70 CORNELL L. REV. 779, 835 (1985) (footnotes ommited).
It is noteworthy that resistance to more flexible
applications of Rule 23 has diminished over time. See In re
Taxable Mun. Bond Secur. Litig., 1994 WL 643143, 619
N.Y.S.2d 1005 (E.D. La. 1994) (commenting upon this trend).
The evolution of the reception accorded settlement classes has
manifested itself in the successive versions of the Manual for
Complex Litigation. The first edition of the Manual criticized
the initiation of settlement negotiations before certification, and
discouraged all such negotiations. See MCL § Ist § 1.46. The
second edition recognizes the potential benefits of settlement
classes but still cautioned that “the court should be wary of
presenting the settlement to the class.” MCL § 30.45 at 243.
The (draft) third version acknowledges that “[s]ettlement
classes offer a commonly used vehicle for the settlement of
complex litigation” and aims only to supervise rather than
discourage their use. See MCL §§ 30.45 at 192.
A survey of the caselaw confirms the impression that
resistance to settlement classes has diminished: few cases
since the late 1970’s and early 1980’s even bother to squarely
address the propriety of settlement classes. Moreover, no court
of appeals that has had the Opportunity to comment on the
propriety of settlement classes has held that they constitute a
per se violation of Rule 23. See, €.g., Ace Heating & Plumbing
Co. v. Crane Co., 453 F.2d 30, 33 (3d Cir. 1971) (finding no
prohibition but granting absentees Standing to appeal
settlement approval); Marshall y. Holiday Magic, Inc.,
550 F.2d 1173, 1176 (9th Cir. 1977) (describing how court
approved combined notice of the pendency of the class and the
terms of the proposed settlement); Jn re Beef Antitrust Litig.,
607 F.2d 167 (Sth Cir. 1979); Corrugated Container Antitrust
Litig ., 643 F.2d 195, 223 (Sth Cir. 1981) (upholding settlement
despite pre-certification negotiations with some defendants);
50a
Weinberger v.. Kendrick, 698 F.2d 61 (2d Cir.1982); Mars
Steel, 834 F.2d 677, 681 (7th Cir. 1987) (criticizing settlement
classes but ultimately approving settlement). But some courts
recognize that this practice represents a significant departure
from the usual Rule 23 scenario and thereby counsel that courts
should scrutinize these settlements even more closely.
We acknowledge that settlement classes, conceived of
either as provisional or conditional certifications, represent a
practical construction of the class action rule. Such
construction affords considerable economies to both the
litigants and the judiciary and is also fully consistent with the
flexibility integral to Rule 23. A number of other jurisdictions
have already accepted settlement classes as a reasonable
interpretation of Rule 23 and thereby achieved these substantial
benefits. Although we appreciate the concerns raised about the
device, we are confident that they can be addressed by the
rigorous applications of the Rule 23 requisites by the courts at
the approval stages, as we discuss at greater length herein. For
these reasons, we hold that settlement classes are cognizable
under Rule 23.
E. Are the Rule 23(a) and (b) Findings
Required for Settlement Classes? Does
Finding the Settlement to Be Fair and
Reasonable Serve as a Surrogate for the
Findings? |
There is no explicit requirement in Rule 23 that the
district judge make a formal finding that the requisites of the
rule have been met in order to certify a class. However, most
district judges have routinely done so, assuming that it was
required, and in published dpinions, a number of courts have
endorsed or at least acknowledged the compelling policy
reasons for doing so. See, e.g., Eisenberg v. Gagnon, 766 F.2d
770, 785 (3d Cir.1985); Plummer, 668 F.2d at 659; Interpace
Corp. v. Philadelphia, 438 F.2d 401, 404 (3d Cir.1971); MCL
2d § 30.13 (“The judge should enter findings and conclusions
after the hearing, addressing each of the applicable
Sla
requirements of Rule 23(a) and (b).”). For example, where
there has been some dispute over certification, a court should
give the litigants, particularly the absentees, some statement of
the reasons for its decision. Eisenberg, 766 F.2d at 785.
Articulated findings also simplify the review of complex cases
generally. /d. With respect to settlement classes, we hold that
courts must make the findings because the legitimacy of
settlement classes depends upon fidelity to the fundaments of
Rule 23.!’
Inasmuch as collusion, inadequate prosecution and
attorney inexperience are the paramount concerns in
precertification settlements, see Malchman, 706 F.2d at 433:
Beef, 607 F.2d at 174, the need for the adequacy of
representation finding is particularly acute in settlement class
Situations, given the inquiry’s purpose of detecting cases where
there is a “likelihood that the litigants are involved in a
collusive suit....” Eisen v. Carlisle & Jacquelin, 391 F.2d 555,
562 (2d Cir. 1968).
There appears to be no authority contra this practice.
Indeed, the courts and commentators that have endorsed
settlement classes have seemed to assume that the approving
court made the requisite class determinations at some point.
For example, Newberg’s argument rebutting the charge that the
“tentative assumption” of class status by the court to foster
settlement evades the Rule’s strictures continues:
The actual class tuling is deferred in these
circumstances until after [the] hearing on the settlement
approval, following notice to the class. At that time, the
court in fact applies the class action requirements to
determine whether the action should be maintained as
a class action...
‘7 This conclusion is supported by the text of Rule 23(e). Thatsection
provides that “class action” may not be compromised without court
approval, and arguably a case is not a “class action” in the absence of such
findings.
52a
2 NEWBERG & CONTE § 11.27 11-50. See also Whitford v.
First Nationwide Bk., 147 F.R.D. 135, 142 (WD Ky.1992)
(disregarding even the possibility that these classes would not
have to meet all of the normal certification requisites). Even
the cases where the courts did not recognize a need to make the
determinations demonstrate a heightened concern for fairness
and a more cautious approach to settlement approval. See Ace
Heating & Plumbing Co. v. Crane Co., 453 F.2d 30, 33 (3d
Cir. 1971) (court must be doubly careful where negotiation
occurs before certification and designation of a class counsel);
Mars Steel, 834 F.2d at 681 (applying a higher standard of
fairness), Simer v. Rios, 661 F.2d 655, 664-66 (7th Cir. 1981)
(requiring a higher demonstration of fairness); Weinberger v.
Kendrick, 698 F.2d 61, 69 (2d Cir. 1982) (emphasizing the
extensive discovery and ability and experience of counsel).
Some courts have certified settlement classes “without
articulating or consciously applying Rule 23 tests.”
2 NEWBERG & CONTE § 11.27 at 11-52. See, e.g., Mars
Steel, 834 F.2d at 681 (suggesting that the certification
procedure may not be necessary to combat the potential for
abuse created by the use of settlement classes since that
potential is “held in check by the requirement that the judge
determine the fairness of the settlement ...”); Weinberger v.
Kendrick, 698 F.2d at 73 (determination that proposed
settlement is fair, reasonable and adequate substitutes for Rule
23 findings); Jn re Beef Antitrust Litig., 607 F.2d 167, 177 (Sth
Cir.1979); City of Detroit v. Grinnell, 495 F.2d 448, 464-65 (2d
Cir.1974) (rejecting contention that the court erred when it
approved a settlement and acquiesced in the settlement’s
assumption of the existence of a proper class). Some courts
neglecting the findings have taken the view that the notice of
proposed settlement, which must be preliminarily approved by
the court, “carries the necessary implication that the action
complies with Rule 23.” Beef, 607 F . 2d at 177.
We disagree both with this suggestion and with the
conclusion that a fairness determination is a surrogate for
53a
Rule 23 findings."* Even if we set aside the problem of the
court’s inadequate information, the inquiry into the
settlement’s fairness cannot conceptually replace the inquiry
into the propriety of class certification. Normally, a court
makes the required commonality and typicality determinations
by referencing the original class complaints in order to assure
that the claims alleged by the named plaintiffs are common to
the class (although the class need not share every claim in
common, Hassine v. Jeffes, 846 F.2d 169, 17778 (3d Cir.
1988)), and that the claims alleged by the named plaintiff
occupy approximately the same position of centrality to the
named plaintiffs as they do to the rest of the class. Weiss v.
York Hosp., 745 F.2d 786, 810 (3d Cir. 1984), cert. denied
470 U.S. 1060 (1985). Neither the existence of a settlement
nor the terms of settlement affect the nature of this important
inquiry.
The Rule 23(a) class inquiries (numerosity,
commonality, typicality, and adequacy of representation)
constitute a multipart attempt to safeguard the due process
rights of absentees. Thus, the ultimate focus falls on the
appropriateness of the class device to assert and vindicate class
interests. Conversely, however, the process of negotiation does
not reveal anything about commonality and typicality. One
might argue that these requisites are merely means to the end
of vindicated rights, and that observing the process of
negotiation could demonstrate adequate vindication-the true
aim of the Rule. In our view, a court cannot infer that the rights
'* We note in this regard that other courts have made the determinations
of adequacy of representation and homogeneity of the class when evaluating
the fairness of the settlement for the express purpose of assuring that they
54a
of the entire class were vindicated without having assured that
commonality and typicality were satisfied.
The 23(b)(3) determination is also important in the
regulatory scheme. To be certified as a (b)(3) class, the judge
must determine that “questions of law or fact common to the
members of the class predominate over any questions affecting
only individual members and that a class action is superior to
other available methods for the fair and efficient adjudication
of the controversy.” FED. R. CIV. P. 23(b)(3)." But the
settlement approval inquiry is far different from the
certification inquiry. In settlement situations, the superiority
requirement arguably translates into the question whether the
settlement is a more desirable outcome for the class than
individualized litigation, and may assure that the settlement has
not grossly undervalued plaintiffs’ interests. But even if this is
SO, a point we neither concede nor decide, there remains the
concern about conflicts between those appointed to represent
class interests--the lawyers and named plaintiffs--and the rest
of the class. These concerns, particularly acute with settlement
classes, concentrate the focus of the certification inquiries on
the representational elements.
Certainly, evaluating the settlement can yield some
information relevant to the adequacy of representation
determination under 23(a)(4). The settlement evaluation
involves two types of evidence: a substantive inquiry into the
terms of the settlement relative to the likely rewards of
litigation, see Weinberger, 698 F.2d at 73; Protective Comm.
for Indep. Stockholders v. Anderson, 390 U.S. 414, 424,
88 S.Ct. 1157, 1163, 20 L.Ed.2d 1 (1968), and a procedural
inquiry into the negotiation process. The focus on the
negotiation process results from the realization that a judge
cannot really make a substantive judgment on the issues in the
® As the case before us involves a damages class under Rule 23(b)(3), we
do not address the application of the (b)(1) and (b)(2) requisites which,
without the important right to opt out, involve different considerations.
55a
case without conducting some sort of trial on the merits,
exactly what the settlement is intended to avoid. See
Malchman v. Davis, 706 F .2d at 433. Instead, the court
determines whether negotiations were conducted at arms’
length by experienced counsel after adequate discovery, in
which case there is a presumption that the results of the process
adequately vindicate the interests of the absentees.
Weinberger, 698 F.2d at 74; City of Detroit v. Grinnell, 495
F.2d at 463; Baldwin-United, 105 F -R.D. at 482 (“In order to
supplement judicial examination of the substance of a
compromise agreement, and because a court cannot conduct a
trial in order to avoid a trial, attention must be paid to the
process by which a settlement has been reached.”).
Although the procedural focus on the fairness
determination yields information pertinent to the adequacy of
representation inquiry, it cannot fully satisfy the inquiry. That
is because reliance on the negotiation process used to approve
the settlement to satisfy the class certification requirements
puts excessive pressure on the settlement approved
determinations, and, more fundamentally, such a reliance may
be circular. Cf NEWBERG & CONTE § 11.28 at 11-54
(suggesting a greater need for a court to carefully articulate if
reasons for settlement approval where the class was not
separately certified).
Courts approving settlements have examined the
negotiating process in light of the “experience of counsel, the
vigor with which the case was prosecuted, and the coercion or
collusion that may have marred the negotiations themselves.”
Malchman vy. Davis, 706 F.2d 426, 433 (2d Cir. 1983) (citing
Weinberger, 698 F.2d at 73; Grinnell, 495 F.2d at 465.).
Some of these courts have Suggested that the fact that vigorous,
arm’s length negotiations occurred should allay concerns about
adequacy of representation. But these inferences depend on the
implicit assumption that the lawyers actually negotiating really
were doing so on behalf of the entire class, see 2 NEWBERG
& CONTE § 11.28 at 11-59, assumptions which are Clearly
56a
unjustified in a context where the potential for intra-class
conflict further emperils the class’s representation. Far too
much turns on the adequacy of representation to accept it on
blind faith.
Without determining that the class actually was
adequately represented, the district judge has no real basis for
assuming that the negotiations satisfactorily vindicated the
interests of all the absentees. The focus on the negotiation
process also cannot address the part of the adequacy of
representation inquiry intended to detect situations where the
named plaintiffs are unsuitable representatives of the
absentees’ claims. To state that class members were united in
the interest of maximizing over-all recovery begs the question.
Although that observation might allay some concern about a
conflict between the attorney and the class, a judge must focus
on the settlement’s distribution terms (or those sought) to
detect situations where some class members’ interests diverge
from those of others in the class. For example, a settlement
that offers considerably more value to one class of plaintiffs
than to another may be trading the claims of the latter group
away in order to enrich the former group.
In short, the prophylactic devices used by judges to
approve these pre-certification settlements without ever
formally certifying the class fail to satisfy the requirements of
Rule 23. Without determining that the class claims are
common and typical of the entire putative class and that the
class representatives and their counsel are adequate
representatives, we have no assurance that the district court
fully appreciated the scope and nature of the interests at stake.”°
2° In Malchman v. Davis, 706 F.2d at 433, the court was satisfied by the
district court’s determination that the settlement class satisfied the adequacy
of representation inquiry noting: “There is no doubt that the district court
must make an independent evaluation of whether the named plaintiffs were
adequate representatives of the class... A judge has an obligation to
consider whether the interest of the class are adequately represented.”
(continued...)
Ey
57a
Finally, we note that courts adopting the view that the formal
class determinations are not necessary for settlement classes
may be contravening not only the language of the rule but also
the Supreme Court’s requirement in General T; elephone Co. of
Southwest v. Falcon, 457 U.S. 147, 160, 102 S.Ct. 2364, 2372,
72 L.Ed.2d 740 (1982) (disapproving the trial court’s
insufficient scrutiny of the named plaintiff's capacity to
adequately represent the class), that “[a]ctual, not presumed,
conformance with Rule 23(a) remains, however,
indispensable.” Thus, while we approve the provisional
certification of a settlement class to facilitate settlement
discussions, final settlement approval depends on the finding
that the class met all the requisites of Rule 23.
F. Can There be a Valid Settlement Class That
Would Not Serve as a Valid Litigation Class?
As we have previously explained, courts using the
settlement class device must at some point definitively certify
the class and satisfy themselves that the requisites of Rule 23
have been satisfied. To avoid that process entirely would
dismantle the rule’s carefully constructed mechanism that
serves to protect absentees’ due process rights. Moreover,
despite some courts’ suggestions that the standards are less
rigorous for settlement classes, we do not believe that Rule 23
authorizes separate, liberalized criteria for settlement Classes.
2 (...continued)
(citing East Texas Motor Freight Sys., Inc. v. Rodriguez,43\ U.S. 395,
403-06, 97 S.Ct. 189, 96-98, 52 L.Ed.2d 453 (1977)); see also Plummer,
668 F.2d at 659 & n. 4. We agree that this is an appropriate focus given the
heightened potential for collusion, buy-offs and other abuses in settlement
class situations where the negotiations occur before the court appoints class
representatives and counsel. We still believe, however, that courts should
assure that settlement classes meet all of the requirements of 23(a) and (b).
This prescription is consistent with the heightened duty of courts in class
action settlements to assure that the absentees’ rights are adequately
protected.
58a
At the outset we note that, while some other courts have
nominally complied with the rule, they appear to have assumed
that lower standards apply in settlement class cases. See
Officers for Justice v. Civil Serv. Comm'n of San Francisco,
688 F.2d 615, 633 (9th Cir. 1982), cert. denied, 459 U.S. 1217,
103 S.Ct. 1219, 75 L.Ed.2d 456 (1983) (“[Cl]ertification issues
raised by class action litigation that is resolved short of a
decision on the merits must be viewed in a different light.”);
Fisher Bros. v. Phelps Dodge Indus. Inc., 604 F.Supp. 446, 450
(E.D.Pa. 1985); Jn re Dennis Greenman Securities Litig., 829
F.2d 1539, 1543 (11th Cir. 1987) (“In reviewing settlement
certifications, a special standard has been employed.”); A.H.
Robins, 880 F.2d at 740 (in deciding whether to certify a class,
settlement is at least an important factor in favor and might
even be a per se ground for certification); Manual.2d at
§ 30.45. Other courts have stated that settlement reduces the
potential conflicts among the class and thus enhances the
likelihood of meeting the criteria, presumably the same criteria
a litigation class must satisfy. See, e.g., Bowling v. Pfhizer,
Inc., 143 F.R.D. 141, 159 (S.D. Oh. 1992). Newberg is of this
view. See 2 NEWBERG & CONTE § 11.28, at 11-58.
According to Newberg, though settlement does not
impact the numerosity requirement it may indeed increase the
likelihood of meeting the commonality and typicality inquiries.
“Typicality of claims in a settlement class context requires
proof that the interests of the class representative and the class
are commonly held for the purposes of receiving similar or
overlapping benefits from a settlement.” 2 NEWBERG &
CONTE § 11.28 at 11-58. On this theory, because the court has
delayed the findings until the outcome of the litigation (i.e., the
settlement agreement) is known, the judge conducts the inquiry
based on the relative rewards to the class members rather than
based on the various legal claims of class members. So long as
all plaintiffs get similar benefits from the settlement,
irrespective of the different strengths of their initial claims, the
commonality and typicality inquiries are viewed as likely to be
satisfied.
59a
Under this approach, the adequate representation
inquiry is also simplified in the settlement class context by a
resultoriented approach toward the class requirement findings.
Rather than asking whether the lawyers have sufficient
resources and skills to prosecute the action (as would be the
case with customary class certification procedures), courts, it
is said, need only determine, in hindsight, whether the
settlement was negotiated at arms’ length, and whether the
negotiations were long, thorough and deliberative. See In re
Corrugated Container Antitrust Litig., 643 F.2d 195, 212 (Sth
Cir. 1981) (adequacy judged by sufficiency of settlement); Jn
re Domestic Air Transp. Antitrust Litig., 148 F.R.D. 297, 341
(N.D. Ga. 1993) (inequitable distribution). Courts adopting
this approach require proof only that named plaintiffs’ and
Class interests are not antagonistic. See, é.g., Goodman vy.
Lukens Steel Co., 777 F.2d 113, 123 (3d Cir. 1985) (relying on
absence of conflict to find adequate representation); Lewis v.
Curtis, 671 F.2d 779, 788 (3d Cir. 1982) (finding named
plaintiff an adequate representative despite small stake in
litigation and ignorance of facts and Claims); Steiner vy.
Equimark Corp., 96 F.R.D. 603, 610 (W.D. Pa. 1983) (“The
key question [for the adequacy of representation inquiry] is
whether their interests are antagonistic.”). In these cases,
courts have effectively relied on the settlement’s terms -- the
outcome of the action -- to find the required absence of
antagonism.’! We disagree with this approach, championed
primarily by Newberg. There is no language in the rule that
can be read to authorize separate, liberalized criteria for
** For example, in finding adequate representation, one court noted:
“[S]o long as all class members are united in asserting a common right,such
as achieving the maximum possible recovery for the class, the class interests
are not antagonistic for representation purposes.” Jn re Corrugated
Container Antitrust Litig., 1980-1 Trade Cas. (CCH) P 63, 163at 77,788 n.
10 (S.D. Tex.1979), aff'd, 643 F.2d 195 (SthCir. 1981) (citing WRIGHT &
MILLER, FED. PRACTICE & PROCEDURE CIVIL § 1768,at nn. 7 & 8).
60a
settlement classes.” Although we acknowledge the need for
flexible interpretation of Rule 23 to enable it to achieve its
broader purposes of vindicating difficult individual claims and
conserving judicial resources, see Beef, 607 F.2d at 177-78
(discussing the policy needs for flexibility); Ace Heating, 453
F.2d at 33 (recognizing need to give small claimants who did
not opt out the right to appeal a settlement approval), we
emphasize that Rule 23 is designed to assure that courts will
identify the common interests of class members and evaluate
the named plaintiff's and counsel’s ability to fairly and
adequately protect class interests. See Katz v. Carte Blanche
Corp., 496 F.2d 747, 757 (3d Cir. 1974). Thus, actions
certified as settlement classes must meet the same requirements
under Rule 23 as litigation classes. To allow lower standards
for the requisites of the rule in the face of the hydraulic
pressures confronted by courts adjudicating very large and
complex actions would erode the protection afforded by the
rule almost entirely.
Judge Posner has explained the animating concern
behind this strict application. “The danger of a premature,
even a collusive, settlement is increased when as in this case
the status of the action as a class action is not determined until
22 Indeed, if any difference in standards is warranted, precertification
settlement may raise the adequacy of representation standard. Since this
inquiry must ascertain “whether there has been any collusion or undue
pressure by the defendants on would be class representatives,” see First
Comm. Corp. of Boston Consumer Accts.Litig., 119 F.R.D. 301, 308 (D.
Mass 1987); Alvarado Partners LP v.Mehta, 723 F.Supp. 540, 546 (D.
Colo. 1989), it must carry greater weight in the settlement class context
where there is an enhanced potential for those evils. Thus, while the other
23(a) findings remain important when the action settles, the need to assure
an absence of collusion and an alignment of interests assumes an esrecially
crucial role. Reliance, for the class requisites analysis, on the settlement’s
terms and process also increases the importance of an independent
conclusion of adequate representation (i.e., one not derived solely by
reference to the nature of the negotiations).
oun P 3 petra ME BISLAMA PSE CED NS AEN RS: CARMA
6la
a settlement has been negotiated, with all the momentum that
a settlement agreement generates...” Mars, 834 F.2d at 680.
The foregoing discussion has focused on adequacy of
representation, but the presence of commonality and typicality
are equally important to the class action regime. Certifying a
class without the existence of questions common to the class
(or where the class representatives’ claims are not typical)
perverts the class action process and converts a federal court
into a mediation forum for cases that belong elsewhere, usually
in state court. On the other hand, the cases that make the
settlement class device appear most useful are cases presenting
the most unwieldy substantive and procedural issues, i.e., those
diversity cases in which plaintiffs from many states are
confronted with differing defenses, differing statutes of
limitations, etc.-precisely those cases that stretch the Rule to its
outer-most limits.
This is a troublesome issue-and a close one. Many
mass tort actions have this problem. The School Asbestos
cases and the Breast Implant cases had it, and this case does, as
well. It may initially seem difficult to envision an actual trial \
of these cases because of the differing defenses certain to be
raised under the various bodies of governing law. While the
problem may be overstated,” settlement classes still serve the
useful purpose‘ of ridding the courts-state and federal-of this
albatross even though the case may never have been triable in
class form. But if that were the primary function of the
settlement class, the federal courts would have become a
mediation forum, a result inconsistent with their mission and
limited resources. In sum, “a Class is a class is a class,” and a
reducible to four patterns. That, in our view,was sufficient to satisfy the
commonality and typicality inquiries. The same might be true in this case.
62a
settlement class, if it is to qualify under Rule 23, must meet all
of its requirements. The district court should keep these
matters in mind on remand.
V. IS THE SETTLEMENT CLASS PROPER HERE?
A. Were There Adequate Findings Under Rule
23(a)?
Certain of the objectors in this case contend that the
district court committed plain error by never actually certifying
the class as required by Rule 23. See Brief of French Objectors
at 18. This, of course, would be a serious error, since without
certification there is no class action, and “[iJn a settlement
entered without class certification the judgment will not have
res judicata effect on the claims of absent class members.”
Simer v. Rios, 661 F.2d 655, 664 (7th Cir.1981).
The district court certified the class provisionally in a
pre-trial order. See Pretrial Order No. 7. We have already noted
that provisional certification constitutes an acceptable means
of facilitating settlement negotiations. See 2 NEWBERG &
CONTE § 11.27 at 55-56. It appears that the court believed
that it certified the class by “confirming” the provisional
certification in its order approving the settlement. (JA 1708,
1745.) However, the court did not make the findings we hold
that Rule 23 requires, not even upon approving the settlement.
Because we hold today that courts employing settlement
classes must still make findings that the class complies with
Rule 23(a) and the appropriate parts of Rule 23(b), the court’s
failure to comply with the rule in this respect is a plain error of
law, and hence an abuse of discretion, requiring that the
certification be set aside.
Our conclusion that the settlement class was not
properly certified does not mean that the class could not be
certified on remand. Accordingly, we must consider whether
the existing record is adequate to support class certification, or
whether further record development is required.
63a
\
B. Could the Class Requisites Have Been Met
On The Current Record?
1. Numerosity, Commonality, and
Typicality
As we have explained, a class action-whether certified
for settlement or litigation purposes-must meet the class
requisites enunciated in Rule 23. The district court did not
make findings on these issues. The numerosity requirement of
Rule 23(a) is plainly satisfied in this action encompassing
nearly six million truck owners. The commonality and
typicality inquiries of 23(a), however, raise substantial
concerns about the sufficiency of this class. The record
currently lacks the facts needed to establish these requisites,
and the defendants also ardently maintain that the applicability
of different defenses to different groups of plaintiffs would
prevent the class from satisfying the commonality and
typicality requirements. At this juncture, we leave open the
possibility that, on remand, the district court may indeed find
facts sufficient to support these elements.
2. Adequacy of Representation
a. The Situation of the Fleet
Owners
This settlement class appears to fail to meet Rule
23(a)’s adequacy of representation test. The adequacy of
representation inquiry has two components intended to assure
that the absentees’ interests are fully pursued: it considers
whether the named plaintiffs’ interests are sufficiently aligned
with the absentees, and it tests the qualifications of the counsel
to represent the class. See Weiss v. York Hospital, 745 F.2d
786, 811 (3d Cir.1984); 2 NEWBERG & CONTE § 11.28 at
11-58. On the first prong, we are not satisfied that the interests
of various class members were sufficiently aligned; indeed the
settlement appears to create antagonism within the class.
While some courts have been satisfied that there is no
intra-class conflict where “all class members are united in
iad
64a
asserting a common right, such as achieving the maximum
possible recovery for the class,” Jn re Corrugated Container
Antitrust Litig., 1980-1 Trade Cas. (CCH) ¥ 63, 163 at 77, 788
n. 10 (S.D. Tex.1979), aff'd. 643 F.2d 195 (Sth Cir.1981), we
disapprove such a myopic focus on the settlement terms.
In this case in particular, the conclusion that the
settlement-that (supposedly) maximized class
recovery-satisfied the requirement that class members’ interests
not be antagonistic ignores the conspicuous evidence of such
an intraclass conflict in the very terms of this settlement. The
substantial impediments to fleet owners using these certificates
creates a conflict between their interests in this settlement and
those of individual owners. (The named plaintiffs are all
individual owners.) Moreover, the dubious value of the
transfer option, see Part VI(A)(1)(c) infra, one of the principal
responses to the fleet owners’ objection, does little to reduce
the disparity in the prospective value to the different sections
of the class.
This is not a case where some plaintiffs share the
prospect of a future claim with other class members who
currently have such a claim. The fleet owners will never enjoy
the benefits of the settlement terms, such as the intra-
household transfer option, intended specifically for the benefit
of individual owners. Thus, we must be concerned that
individual owners had no incentive to maximize the recovery
of the government entities; they could skew the terms of the
settlement to their own benefit. Not surprisingly, the
settlement leaves fleet owners with significantly less value than
individual owners. At the very least, the class should have
been divided into sub-classes so that a court examining the
settlement could consider settlement impacts that would be
uniform at least within the sub-classes.
nr ee ae aeigher > yee i.
65a
b. Did Counsel Adequately
Represent the Interests of the
Entire Class?
The other aspect of the adequacy of representation test,
whether counsel is qualified and serves the interests of the
entire class, also gives us reason to pause. Courts examining
settlement classes have emphasized the special need to assure
that class counsel: (1) possessed adequate experience; (2)
vigorously prosecuted the action; and (3) acted at arms length
from the defendant. See, e.g., Malchman, 706 F.2d at 433;
Alvarado Partners, 723 F. Supp. at 546. The first criterion is
no problem, for these counsel clearly possess the experience
and skills to qualify them to pursue these sorts of actions. But
the second and third points require attention in view of lack of
significant discovery and the the extremely expedited
settlement of questionable value accompanied by an enormous
legal fee.
Before addressing the latter points, it is necessary to
begin with some legal theory discussing the structural nature of
fee arrangements in class actions of this type, having in mind
that even honorable counsel--like class counsel here--may be
compromised by the possibility of a large fee.
' (1) Class Action
Attorneys’ Fees
Theory and Structure
Beyond their ethical obligations to their clients, class
attorneys, purporting to represent a class, also owe the entire
class a fiduciary duty once the class complaint is filed. See 2
NEWBERG & CONTE § 11.65 at 11-183; Greenfield v.
Villager Indus., Inc., 483 F.2d 824, 832 (3d. Cir. 1973). The
large fees garnered by some class lawyers can create the
impression of an ethical violation since it may appear that the
lawyer has an economic stake in their clients’ case. But class
actions cannot be analyzed in the same framework as
conventional bipolar litigation. Because of the collective
action problems associated with cases where individual claims
66a
are relatively small, WRIGHT, MILLER & KANE, 5 Federal
Practice and Procedure § 1754 at 49, and the social desirability
of many class suits (the private enforcement model), id. at 51;
Sprogis v. United Airlines, Inc. 444 F.2d 1194 (7th Cir. 1971),
large attorneys’ fees serve to motivate capable counsel to
undertake these actions. Thus, large fee awards standing alone
do not suffice to show that the representation was inadequate
or unethical. These allowances generally reflect the realization
that the lawyer represents numerous individuals with somewhat
varying interests, not an acceptance of the situation where the
lawyer’s personal interests trump the interests of the entire
class.
Some commentators blame the system of compensating
class action lawyers in a manner that fails to confront fully the
differences between class action litigation and classical bipolar
litigation for creating incentives that diverge markedly and
predictably from their clients’ interests. The leading critic is
Professor Coffee. See John C. Coffee, Jr., Understanding the
Plaintiff's Attorney: The Implications of Economic Theory For
Private Enforcement of Law Through Class and Derivative
Actions, 86 COLUM. L. REV. 669, 671-72 (1986) (noting that
critics “have argued that the legal rules governing the private
attorney general have created misincentives that unneccessarily
frustrate the utility of private enforcement. These critics have
focused chiefly on the conflicts that arise between the interests
of these attorneys and their clients in class and derivative
actions ....”) (hereinafter Understanding the Plaintiff's Attorney
); id at 677 (“Ultimately, the most persuasive account of why
class actions frequently produce unsatisfactory results is the
hypothesis that such actions are uniquely vulnerable to
collusive settlements that benefit plaintiff's attorneys rather
than their clients.”); John C. Coffee, Rescuing the Private
Attorney General: Why the Model of the Lawyer as Bounty
Hunter Is Not Working, 42 MD. L. REV. 215 (1983); John C.
Coffee, Zhe Unfaithful Champion: The Plaintiff as Monitor in
Shareholder Litigation, 48 SUM LAW & CONTEM. PROBS.,
5 Summer 1985; Kevin M. Clermont & John D. Currivan,
PILAR IE EE HOERAREE LY Sot BS
> ea RR wabdicnest ocann
rr » a ee ’
67a
Improving on the Contingent Fee, 63 CORNELL L. REV. 529
(1978); Murray L. Schwartz & Daniel J.B. Mitchell, An
Economic Analysis of the C. ontingency Fee in Personal-Injury
Litigation, 22 STAN. L. REV. 1125 (1970).
Economic models have shown how conventional
methods of calculating class action fee awards give class
counsel incentives to act earlier than their clients would deem
optimal. See Coffee, Understanding the Plaintiff's Attorney,
86 COLUM. L. REV. at 688. Because, under a percentage of
recovery award mechanism, the attorney will only enjoy a
relatively small portion of whatever incremental award he can
extract from the defendant, the defendant can pressure the
plaintiffs’ attorney into early settlement by threatening to
expend large sums on dilatory tactics that would run the
expenses up beyond what plaintiffs’ attorneys can expect to
profit. Jd. at 690. Rather than presenting a possible solution,
the lodestar method seemingly exacerbates the problem of
cheap settlement by divorcing the fee award from the
settlement’s size, since plaintiffs’ attorneys have no incentive
to take the risk on a trial for potentially larger award to the
class where their own fees will not necessarily reflect the
greater risk taken on trial. See also id. at 718 (discussing how
lodestar method may create structural collusion).
Coffee ‘also blames the principal-agent problem
endemic to class actions for creating a situation where the
defendants and plaintiffs can collusively settle litigation in a
manner that is adverse to the class’s interest: “At its worst, the
settlement process may amount to a covert exchange of a cheap
settlement for a high award of attorney's fees. Although courts
have long recognized this danger and have developed some
procedural safeguards intended to prevent collusive
settlements, these reforms are far from adequate to the task.”
Id. at 714 n. 121 (citing cases). A number of commentators
have identified settlements which afford only nonpecuniary
relief to the class as prime suspects of these cheap settlements.
See Coffee, Understanding The Plaintiff's Attorney, 86
68a
COLUM. L. REV. at 716 n. 129; JONATHAN R. MACEY &
GEOFFREY P. MILLER, The Plaintiffs’ Attorneys Role in
Class Action and Derivative Litigation: Economic Analysis
and Recommendations for Reform, 58 U. CHI. L. REV. 1, 45
n. 10 (1991); Nancy Morawetz, Bargaining, Class
Representation, and Fairness, 54 OHIO ST. L.J. 1, 5 n. 40
(1993).
While courts may fail to appreciate adequately the
distinction between conventional bipolar litigation and class
actions in many respects, they may over-emphasize these
differences in other respects. To be sure, courts will be willing
to award fees in class actions that would appear extraordinary
and arguably improper in conventional litigation.
Nevertheless, some of the critiques based on ethical or
collusive concerns remain instructive. Although subsequent
versions seem to avoid a discussion, the Manual for Complex
Litigation (First) acknowledged the potential for attorney-class
conflict. It condemned fees that are paid separate and apart
from the settlement funds paid to the class because amounts
“paid by the defendant(s) are properly part of the settlement
funds and should be known and disclosed at the time the
fairness of the settlement is considered.” MCL Ist § 1.46.
One court has noted that the “effect of such an
arrangement [where the counsel fees are not resolved and the
details not included in the class notice] may be to cause counsel
for the plaintiffs to be more interested in the amount to be paid
as fees than in the amount to be paid to the plaintiffs.” Jn re
General Motors Corp. Engine Interchange, 594 F.2d at 1131.
Commentators have also noted how, where there is an absence
of objectors, courts lack the independently-derived information
about the merits to oppose proposed settlements. See Coffee,
Understanding the Plaintiff's Attorney, 86 COLUM. L. REV.
at 714 n. 131. Of course, by endorsing a practice where the
class is, for practical purposes, deprived of information
concerning the fees, courts foster a situation where there will
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69a
be fewer objectors.”
(2) The Stewardship of
Counsel Here
A number of factors militate against the conclusion that
the class’s interests were sufficiently pursued here. First, the
settlement arguably did not maximize the class members’
interests. Every owner received a coupon whose value could
only be realized by purchasing a new truck. Significant
obstacles existed to the development of a secondary market in
the transfer certificates given that the transfer restrictions and
their limited lifespan minimize the value of the transfer option.
Second, class counsel effected a settlement that would yield
very substantial rewards to them after what, in comparison to
the $9.5 million fee, was little work.
Third, the fact that the settlement involves only noncash
relief, which is recognized as a prime indicator of suspect
settlements, increases our sense that the class’s interests were
not adequately vindicated. The separate negotiation of the fee
agreement and the failure to disclose the amount of the award
in the class notice only enhance this sense that counsel may
have pursued a deal with the defendants separate from, and
perhaps competing for the defendant’s resources with, the deal
negotiated on behalf of the class. And although the degree to
which a settlement hurts a defendant is not ordinarily a
measure of the settlement’s adequacy, the fact that this
settlement might actually benefits GM by motivating current
Owners to buy new trucks from the company (the settlement
may arguably be viewed as a GM sales promotion device)
certainly does little to allay the concern that the settlement did
not advance the interests of the class as much as it might have.
** The information on fee agreements may prompt potential objectors
tooppose not only the awards but, also, to the extent they conclude arm’s
length negotiations were compromised, the adequacy of the settlement and
the propriety of the class.
70a
Fourth, our concern about the vigor of counsels’
prosecution of the class claims, specifically the possibility that
counsel did not do right by the class, is buttressed by the legacy
of Prandini v. National Tea Co., 557 F.2d 1015, 1021 (3d Cir.
1977). In Prandini, this court recognized the potential for
attorney class conflicts where the fees, while ostensibly
stemming from a separate agreement, were negotiated
simultaneously. We characterized simultaneity of fee and
settlement negotiations as a “situation ... having, in practical
effect, one fund divided between the attorney and client.” To
respond to this danger of collusion between the class counsel
and defendant, Prandini and the Third Circuit Task Force
Report on court awarded attorney’s fees disapproved fee
discussions until after the achievement and approval of
settlement. See Prandini, 557 F.2d at 1021; Court Awarded
Attorney's Fees, Report of the Third Circuit Task Force, 108
F.R.D. 238, 266 (1985) [hereinafter Task Force].
In this case, there were strong indications that such
simultaneous negotiations in fact transpired. Indeed, there was
evidence in a letter from class counsel that at least some
portion of the fees and expenses had to have been negotiated
simultaneously with the settlement. (Butler Letter on fees,
Jenkins app. at 701). The court justified its dismissal of the
allegation of simultaneous negotiation by citing (1) a statement
in the letter that the “attorneys’ fees were negotiated separately,
*° Other courts and authorities have followed this guide. See,e.g., Ashley
v. Atlantic Richfield Co., 794 F.2d 128 (3d Cir. 1986); MCL 2d § 30.41;
2 NEWBERG & CONTE § 11.29 at 11-62 (recognizing potential forconflict
where settlement and fees to be paid by defendant simultaneously
negotiated). To implement this prophylactic bar fully, courts would have to
require class counsel to disclose all understandings as to fees, not simply
concluded, formal agreements. See MCL § 2d § 34.42 at 237-39. Although
it recognized that this prophylactic rule could impede some settlements by
making it impossible for the defendant to size up its totalliability (i.e. the
sum of the settlement amount and any fees the defendant agrees to pay),
Task Force 108 F.R.D. at 267-69, the Task Force concluded that avoiding
the conflicts justified this cost.
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afer we agreed on everything else,” and (2) GM’s reservation
of the right to contest any award of fees that it deemed
unreasonable. Even though we assume that these are factual
findings, thus ordinarily deserving deference, we think these
findings were made by reference to an erroneous legal
standard. Indeed, neither of these bases is persuasive,
especially in view of GM’s acquiecence in a patently baseless
ground for augmenting the counsel fee, see Part VII infra.
In considering the adequacy of representation, we are
loath to place such dispositive weight on the parties’
self-serving remarks. And even if counsel did not discuss fees
until after they reached a settlement agreement, the statement
would not allay our concern since the Task Force
recommended that fee negotiations be postponed until the
settlement was judicially approved, not merely the date the
parties allege to have reached an agreement. We recognize that
Evans v. Jeff D., 475 U.S. 717, 734-38, 106 S.Ct. 1531,
1541-43, 89 L.Ed.2d 747 (1986), overruled Prandini’s strict
rule prohibiting simultaneous negotiations. However, many of
the concerns that motivated the Prandini rule remain, and we
see no reason why Jeff D. or its underlying policy of avoiding
rules that impede settlement preclude us from considering the
timing of fee negotiations as a factor in our review of the
adequacy of the class’ representation. Consequently, the
likelihood that the parties did negotiate the fees concurrently
with the settlement in this case increases our concern about the
adequacy of representation. ®
Nor would GM’s reservation of the right to appeal the
fee award establish that the fee was negotiated separately since
the likelihood that GM would want to contest an award based
on a fee petition to which it agreed is quite small. The fact is
confirmed by GM’s “lay down” position with respect to the fee
application. Although the Supreme Court clearly invalidated
** While the parties could have sought a waiver permitting simultaneous
negotiations, Task Force at 269, the parties did not seek one here.
72a
the use of mulitipliers in lodestar awards in 1997, see City of
Burlington v. Dague, --- U.S. ----, 112 §.Ct. 2638, 120 L.Ed.2d
449 (1992), GM did not apprise the district court of this fact
when it was approving the fee award, or complain when the
district court used a multiplier in the calculations. This posture
of GM suggests that its reservation of the right to appeal the fee
award should not be given great weight in determining whether
the settlement and attorney’s fee were negotiated separately.
But we hasten to add that we have not resolved these factors.
We only hold today that the court did not make the necessary
findings, and we remand to the district court so that it can make
the necessary Rule 23 findings.
The thrust of the foregoing discussion is that the
circumstances under which the settlement evolved, made
possible by the settlement class device, may have compromised
class counsel in a manner raising doubts as to adequacy of
representation. The district court will examine this aspect of
the matter on remand. Perhaps, on a more developed record,
the adequacy of representation will be established. These
concerns underscore the importance of having the district court
make Rule 23 findings. Although we do not believe that the
class would meet the requirements for certification on the
current record, we do not preclude the possibility that
certification could be properly supported on a more developed
record. Thus, we remand this action to the district court so that
it can re-examine the class certification and the settlement and,
if appropriate, certify the class by making the findings required
by Rules 23(a).
VI. IS THE SETTLEMENT FAIR, REASONABLE,
AND ADEQUATE?
Invoking the correct standard of review under Girsh v.
Jepson, 521 F.2d 153, 157 (3d Cir. 1975), the objectors also
argue that the district court abused its discretion, when it
approved the settlement as fair, reasonable and adequate.
Because we leave open the possibility that the district court
may on remand properly certify the class pursuant to Part V of
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this opinion, we must also address the district court’s approval
of the settlement. Rule 23(e) imposes on the trial judge the
duty of protecting absentees, which is executed by the court’s
assuring that the settlement represents adequate compensation
for the release of the class claims. See 2 NEWBERG &
CONTE § 11.46 at 11-105 to 11-106. Some courts have
described their duty under Rule 23(e) as the “fiduciary
responsibility” of ensuring that the settlement is fair and not a
product of collusion. Jn re Warner Commun. Secur. Litig.,
798 F.2d 35, 37 (2d Cir.1986); see also, Plummer v. Chemical
Bank, 668 F.2d 654, 658 (2d Cir. 1982); Grunin vy.
International House of Pancakes, 513 F.2d 114, 123 (8th Cir.),
cert. denied, 423 U.S. 864, 96 S.Ct. 124 (1975); Alvarado
Partners L.P. v. Mehta, 723 F.Supp. 540, 546 (D. Colo. 1989).
At all events, where the court fails to comply with this duty,
absentees have an action to enjoin the settlement.
2 NEWBERG & CONTE § 11.23.
In order for the determination that the settlement is fair,
reasonable, and adequate “to survive appellate review, the
district court must show it has explored comprehensively all
relevant factors.” Malchman, 706 F.2d at 434 (citing
Protective Committee, 390 U.S. at 434, 88 S.Ct. 1157;
Plummer, 668 F.2d at 659). A number of courts have
recognized the:need for a special focus on precluding the
existence of collusion. See Malchman, 706 F.2d at 433
(advocating a focus on the negotiation process to uncover
possible collusion); General Motors Interchange, 594 F.2d at
1125 (finding a need for heightened scrutiny of the settlement
stemming from the yotential for collusive settlement).
The topic of class action settlement has received much
attention, which is understandable given the growing frequency
of the settlement of increasingly large claims through the class
action device. See In re A.H. Robins Co., 880 F.2d 709, 739-40
(4th Cir.1989) (discussing the use of the device to settle
various mass tort cases); In re Taxable Municipal Bond Secur.
Litig., 1994 WL 643142 at *5 (noting the dramatic change in
74a
attitudes of courts and commentators toward the settlement
class). The drive to settle class actions has also grown,
notwithstanding the potential for collusive settlements to
compromise absentee interests. Courts undertaking the special
role of supervising class action settlements are apparently
heeding the public policy in favor of settlement, see
2 NEWBERG & CONTE § 11.41 at 11-85, and acknowledging
the urgency of this policy in complex actions that consume
substantial judicial resources and present unusually large risks
for the litigants.
We have already noted the special difficulties the court
encounters with its duties under Rule 23(e) in approving
settlements where negotiations occur before the court has
certified the class. Because of such difficulties, many courts
have required the parties to make a higher showing of fairness
to sustain these settlements. See, e.g., Ace Heating &
Plumbing Co. v. Crane Co., 453 F.2d 30, 33 (3d Cir. 1971)
(“{[W]hen the settlement is not negotiated by a court designated
class representative the court must be doubly careful in
evaluating the fairness of the settlement to the plaintiff's
class.”); General Motors Interchange, 594 F.2d at 1125
(attributing a need for heightened scrutiny of the settlement to
the potential for collusive settlement); Weinberger, 698 F.2d
at 73 (higher showing of fairness required in precertification
settlements and special focus on assuring adequate
representation and the absence of collusion); Malcham v.
Davis, 706 F.2d 426, 434 (2d Cir.1983); Mars Steel v.
Continental Ill. Nat’! Bank & Trust, 834 F.2d 677, 681 (7th
Cir.1987); County of Suffolk v. Long Island Lighting Co., 907
F.2d 1295, 1323 (2d Cir.1990); 2 NEWBERG & CONTE
§ 11.23; MCL 2d § 30.42 (citing the informational deficiencies
faced by the court and counsel in pre-certification settlements).
We affirm the need for courts to be even more scrupulous than
usual in approving settlements where no class has yet been
formally certified.
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Settlements that have survived this heightened standard
have involved much stronger indications of sustained advocacy
by the de facto class counsel than we observe in this case. See
Weinberger v. Kendrick, 698 F.2d 61 (2d Cir.1982) (settlement
discussions did not commence until after four years of
discovery supplemented by another investigation by a trustee
and after plaintiffs rejected the first settlement offer); Jn re
Beef Indus. Antitrust Litig., 607 F.2d at 177-78 (settlement
discussions began after six months of discovery; action
pending for three years, court was fully briefed); City of
Detroit v. Grinnell, 495 F.2d 448, 464 (2d Cir. 1974)
(approving settlement after several counsel vied for position for
four years and voiced strenuous objections, explaining that
Manual’s concerns about settlement classes articulated by the
Manual for Complex Litigation only pertained to settlement in
the early stages of litigation); cf. Plummer v. Chemical Nat’!
Bank, 668 F.2d 654 (2d Cir. 1982) (rejecting settlement where
plaintiffs’ counsel relied on information voluntarily furnished
by defendants).
There are certain basic questions that courts can ask to
detect those cases settled in the absence of sustained effort by
class representatives sufficient to protect the interests of the
absentees. See MCL § 2d § 30.41. For instance: Is the relief
afforded by the settlement significantly less than what appears
appropriate in light of the preliminary discovery? Have major
causes of action or types of relief sought in the complaint been
omitted by the settlement? Did the parties achieve the
settlement after little or no discovery? Does it appear that the
parties negotiated simultaneously on attorneys’ fees and class
relief? Even acknowledging the possibility of some
overpleading, these questions raise a red flag in this case.
With the courts’ heightened duty to scrutinize this
precertification settlement and some of these rudimentary
indicators in mind, we now apply our nine-factor Girsh test,
see Part III supra, and conclude from the balance of these
factors that the district court’s conclusion that the settlement
76a
was fair and reasonable constitutes an abuse of discretion.
Coincidentally, this result tracks the conclusions of a Texas
appeals court that, based on an analysis similar to that of Girsh,
set aside an order approving a substantially identical settlement
of similar claims brought by residents of Texas. See Bloyed v.
General Motors, 991 S.W.2d at 422.
A. Adequacy of Settlement-General Principles
This inquiry measures the value of the settlement itself
to determine whether the decision to settle represents a good
value for a relatively weak case or a sell-out of an otherwise
strong case. The Girsh test calls upon courts to make this
evaluation from two slightly different vantage points.
According to Girsh, courts approving settlements should
determine a range of reasonable settlements in light of the best
possible recovery (the eighth Girsh factor) and a range in light
of all the attendant risks of litigation (the ninth factor). See
Girsh v. Jepson, 521 F.2d at 157; see also Malchman v. Davis,
706 F.2d 426, 433 (2d Cir. 1983) (identifying a similar test);
City of Detroit v. Grinnell Corp., 495 F.2d 448, 463 (2d Cir.
1974) (same).
In formulaic terms we agree that “in cases primarily
seeking monetary relief, the present value of the damages
plaintiffs would likely recover if successful, appropriately
discounted for the risk of not prevailing, should be compared
with the amount of the proposed settlement.” MCL 2d § 30.44
at 252. This figure should generate a range of reasonableness
(based on size of the proposed award and the uncertainty
inherent in these estimates) within which a district court
approving (or rejecting) a settlement will not be set aside. See
Newman vy. Stein, 464 F.2d 689, 693 (2d Cir. 1972). The
evaluating court must, of course, guard against demanding too
large a settlement based on its view of the merits of the
litigation; after all, settlement is a compromise, a yielding of
the highest hopes in exchange for certainty and resolution. See
Cotton v. Hinton, 559 F.2d 1326, 1330 (Sth Cir. 1977). The
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primary touchstone of this inquiry is the economic valuation of
the proposed settlement.
We turn to this analysis. As will appear, the district
court’s conclusion that the settlement was within the range of
reasonableness rests heavily on the proposition that the class
had never proven any diminution in value of the trucks. It
ignored the fact that the coupons provided no cash value and
made no provision for repairing the allegedly life-threatening
defect. For the reasons that follow, we believe that the district
court did not sufficiently scrutinize the valuations of the
settlement, and that, on this record, the settlement appears to be
inadequate. Consequently, we will conclude that the district
court erred when it found that the settlement fell within the
range of reasonableness.
1. Valuation of the
Settlement-Introduction
The value of the $1,000 certificates is sharply disputed.
GM argues that the certificates are worth close to their face
value since they can be redeemed for a broad array of GM
trucks and can be used in combination with dealer incentives.
For those unable or unwilling to purchase another GM truck,
GM argues, cash can be realized from transferring the
certificate within the household for full value or selling the
certificate for $500. Plaintiffs presented an expert, Dr. Itamar
Simonson, who placed the value of the certificates between
$1.98 and $2.18 billion, based on an estimate that 34% to 38%
of the class would redeem the certificate in purchasing a new
truck and an additional 11% of the class would sell their
certificates for $500. Objectors contest these estimates and
many of the assumptions used to generate them.
We therefore analyze several of the foundations for the
district court’s evaluation. First, we inquire about the
reliability of plaintiffs’ witness’s valuation. Second, we
explore the adequacy of the district court’s consideration of the
possibility that some class members would not be able to use
the coupons at all. Third, we inquire as to whether the quite
78a
significant restrictions on transfer of the certificates present
obstacles to the development of a market so as to render the
estimates of their worth unreasonably inflated. Finally, we
consider whether the size of the attorneys’ fees agreement
suggests that GM attached a greater value to the class claims
than proponents of the settlement would have us believe.
These factors lead ineluctably to the conclusion that the district
court overvalued this settlement, which in turn gives credence
to the contention of the objectors that the proffered settlement
was, in reality, a sophisticated GM marketing program.
a. Plaintiffs’ Witness Dr. Itmar
Simonsen
Dr. Simonsen’s methods and assumptions raise serious
doubts about the reliability of the valuations they generated.
Although Simonsen’s conclusion was based on his estimate
that between 34% and 38% of the class members would use the
certificate, his own telephone survey revealed that only 14% of
the class reported that they would “definitely” or “probably”
buy a new truck. Apparently Simonsen only excluded those
who responded that they would “definitely not buy” or
“probably not buy” a new truck, a methodological choice
which is questionable. Furthermore, Simonsen discounted the
Statistics by seemingly arbitrary factors in an effort to be
“conservative,” but without some basis or explanation for
deriving those factors, we have no way of judging whether they
were conservative or aggressive.
Even more importantly, the raw survey data probably
overstate the prospects that the certificates will be used since
there are substantial obstacles to obtaining and transferring the
certificates, none of which Simonsen deals with. Finally,
Simonsen supposed that a higher percentage of fleet owners
would redeem the certificates, but this seems to disregard the
statutory and regulatory constraints that often restrict fleet
buyers’ purchase decisions. Indubitably all of these concerns
reduce the value of the settlement, yet Simonson appears
RPE ire eR ees eA ibe
PR ae OT SL i a PAP ee ee os
79a
simply to have multiplied his estimated number of users by the
coupon amount or transfer value.
On the other hand, although various objectors have
made a good argument that the net value of the certificates will
also be eroded by rising truck prices (which would allegedly be
influenced both by the huge number of certificates that would
need to be redeemed within a relatively brief time and by the
fact that dealers may take advantage of customers they know
to be somewhat tied to the purchase of a GM truck by their
desire to realize value from the coupon), we will, to be
conservative, not take this factor into account. Even so
Simonsen’s methodology undermines his conclusion to the
extent that his valuation cannot support the settling parties’
case.
b. Inability of Class Members to
Use Certificates
The district court also erred by not adequately
accounting for the different abilities (not inclinations) of class
members to use the settlement. One sign that a settlement may
not be fair is that some segments of the class are treated
differently from others. See Piambino v. Bailey, 610 F.2d at
1329; In re GM Corp. Engine Interchange Litig., 594 F.2d at
1128; MCL 2d 5 30.41 at 236. Consequently, the fact that the
coupon settlement benefits certain groups of the class and not
others suggests that the district court did not adequately
discharge its duties to safeguard the interests of the absentees.
See In re Fine Paper Antitrust Litigation, 617 F.2d 22 (3d Cir.
1980) (ongoing duty of the Judge to protect absentees);
Piambino v. Bailey, 610 F.2d 1306, 1329 (duty to assure the
settlement is fair, reasonable and adequate with respect to each
category of the class).
People of lesser financial means will be unable to
benefit comparably from the settlement. GM cites a number of
other judicially approved class action settlements that awarded
coupons and argues that, since this coupon provides far more
consideration, it necessarily merits approval. See, e.g., New
80a
York v. Nintendo of Am. Inc., 775 F. Supp. 676, 679
(S.D.N.Y.1991) ($5 discount coupon for video game purchase
approximately $200); Jn re Cuisinart Food Processor Antitrust
Litig., 1983-2 Trade Cas. (CCH) { 65 at 680 (D.Conn. 1983)
(discount coupons with maximum value of $100 for machines
costing approximately $100 to $300); Jn re Domestic Air
Transp. Antitrust Litig., 143 F.R.D. 297, 331 (N.D. Ga. 1993)
(certificates worth between $10 and $200 for flights costing
between $50 and $1500).
These cases, however, differ dramatically in the amount
of money required to purchase the good--i.e. to realize the
certificate’s value--and in the frequency with which a typical
consumer inight expect to purchase the good. Whether a new
truck costs between $20,000 and $33,000 as some objectors
claim (JA 1884, 1889-90, 2210) or some amount “far less” than
that, as GM claims, this purchase is not comparable to buying
a new food processor or even an airline ticket. As the district
court acknowledged, “a substantial number of class members”
(Op. at 18) would not be able to afford a new truck within the
fifteen month coupon period. Both the high cost of the trucks
and the infrequency of a consumer’s purchase of a new truck
(relative to the fifteen month redemption period) make using
these certificates significantly more difficult than those in the
other coupon settlements, for all class members but particularly
for the poorer ones.
Even where class members do manage to use the
certificates, we are concerned about their real value. It may not
be the case that the certificates saved those class members
$1,000 on something they would have otherwise bought; those
class members may only have purchased new GM trucks
because they felt beholden to use the certificates. Thus, rather
than providing substantial value to the class, the certificate
settlement might be little more than a sales promotion for GM,
in just the way that the Bloyed court characterized the
settlement as a “tremendous sales bonanza” for GM. Bloyed v.
General Motors Corp., 881 S.W.2d at 431.
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We turn then to the fleet buyers, who constitute a
readily identifiable category of plaintiffs arguably
disadvantaged by the settlement. Budgetary constraints
prevent some of them from replacing their entire fleets within
the fifteen month redemption period.”” Competitive bidding
requirements also apparently impede many of these entities
from being able to use the certificates. Because there is no
assurance that GM will be the lowest bidder, the government
entities bound by these requirements may not be able to use the
certificates. See, e.g. The Louisiana Public Bid Law, LA. R.
STAT. § 38:2212(A)(1)(a). [Jefferson Parish Brief at 5]. The
district court dismissed these objections saying it was
“confident that ingenious counsel will be able to structure
bidding requirements so that the governmental entities can take
full advantage of the certificates.” (Op. at 26.) The district
court’s observation, while perhaps partially accurate, represents
far too cavalier a dismissal of a potentially serious intra-class
and conflict inequity.
The named plaintiffs argue that, if certain fleet buyers
and individuals were dissatisfied with the settlement’s terms,
they could simply opt-out of the class and pursue their own
relief individually. (Plaintiff's Brief at 15 n. 13.) While such
an argument might theoretically be true, it ignores the realities
of pursuing small claims. It would cost considerably more to
litigate individual claims than the litigant could recover, using
either a retrofit or a warranty theory to measure damages. And
the district court apparently did not consider the possibility of
a subclass of fleet owners, though that might alter the anatomy
of the settlement. At all events, the right of parties to opt out
does not relieve the court of its duty to safeguard the interests
of the class and to withhold approval from any settlement that
*” This is true of, for example, the State of lowa, State of Indiana, West
Virginia Department of Transportation, State of New York, Commonwealth
of Pennsylvania Department of Transportation and Department of General
Services, County of Los Angeles, California, Jefferson Parish, Louisiana,
and the City of New York.
82a
creates conflicts among the class. In sum, the relative inability
of class members to use the certificates militates against
settlement approval.
e. Value of the Transfer Option
In order to support its conclusion that the settlement
was reasonable and fair, the district court cited the ability of
fleet buyers and those consumers with budget constraints to
realize value from the certificates by transferring them. We
believe the value of the transfer option is dubious, and
consequently that the settlement was unfair to substantial
portions of the class.
Simonsen’s valuation of the settlement includes $157
million attributable to transferred certificates. Simonsen
calculated that holders of the certificates could realize $250
from the sale of the transferred certificates (with a $500 face
value). He gave no explanation for his assumption of a $250
market value. To the extent that this methodology is also
dubious, it compounds the skewing of the valuation wrought by
his usage estimates, see Part VI(A)(1)(a) supra.
The value of this option depends on the development of
a secondary market for these certificates. But there is no
assurance that a market will develop; indeed, the restrictions on
transfer, which GM claims are necessary to prevent fraud, pose
significant barriers to the creation of such a market. The
requirement that holders send in their $1,000 or original
certificate to exchange for the $500 transfer certificate imposes
very significant transaction costs since the parties must agree
on a price before the original holder initiates the transfer
process (which could easily last several weeks). During that
process, there is substantial market risk, for the price of the
transfer certificate could well move dramatically and induce a
breach in the purchase agreement by one of the parties.
Breaches would pose a real problem in this case because the
transfer certificate cannot be reissued in another’s name and
thus cannot be resold. Because of these risks, individuals will
be quite reluctant to contract for these transfer certificates.
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Even worse, the one- time transfer restriction also precludes the
development of a market making clearing house mechanism.
In our view, therefore, it is quite possible that holders will be
unable to realize any significant value from the transfer option.
Aside from the effect of the transfer restrictions, we
also question Simonsen’s valuation on the basis that it did not
account for the inability to use the transfer Certificates in
conjunction with other incentive plans. For example, the
incremental value of the $500 transfer certificate to class
members would be completely eroded if GM offers a $1,000
dealer rebate program, since the class member would be forced
to choose between the plans and would therefore be no better
off then the general public.
The district court did not take cognizance of these
factors. It erred when it presumed development of a liquid
market for these transfer certificates with very little support in
the record for it, and when it relied on a putative value of the
transfer option arbitrarily ascribed by plaintiffs’ expert to find
that the settlement was fair and reasonable. Although objectors
might have made out an even stronger case by proffering their
Own expert on this valuation, the court has an independent duty
to scrutinize the settlement’s value and any evidence offered to
support it. Accordingly, we find that evidence pertaining to the
incremental value created by the transfer option does not
support the valuation of the settlement.
d. GM’s Implicit Valuation of
the Claim
Our concerns about the adequacy of the settlement are
complicated by the generous attorneys’ fees GM agreed to pay
in this case. Although originally GM vigorously contested the
viability of the class claims and the class, the company, in view
of its willingness to pay attorneys’ fees of $9.5 million, may,
at the time of settlement, have valued the claims at some
84a
substantial multiple of the fee award.“ This $9.5 million
attorney’s fee award seems unusually large in light of the fact
that the settlement itself offered no cash outlay to the class.
GM’s apparent willingness to pay plaintiffs’ counsel close to
$9.5 million indicates that the party in perhaps the best position
to evaluate the claim may have thought the action, which both
plaintiffs’ counsel and the defense contend was not worth
much, posed a significant enough threat to cause GM to strik
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