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Class Action Defense Issues: Settlement Procedure and Class Certification for Settlement – Rule 23(e)

Class action lawsuits are often filed for the purpose of bringing sufficient leverage to bear both through the sheer cost of defending against the lawsuit and the risk, however remote, of substantial liability so as to force the defendant to settle. Thus, plaintiffs’ counsel often use class actions as weapons of extortion, seeking to compel a settlement from defendants. If a defendant elects to but its peace, it does not want to settle only with the named plaintiffs because then there is no guarantee that another lawsuit will soon follow. On the contrary, it is likely that rewarding plaintiffs’ counsel with a settlement will invite another lawsuit. The defendant, therefore, demands the broadest release possible, and plaintiffs’ counsel are generally willing to oblige provided that they have been compensated adequately. In such a situation, the Rule 23 elements of class certification are not meaningfully contested; indeed, the parties often stipulate (as part of the proposed settlement) that the class may be certified.

Rule 23(e) addresses the settlement of class actions. It 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.”

A class action settlement will not bind members of the class unless and until the class is certified. The prerequisites to class certification are set forth in Rule 23 of the Federal Rules of Civil Procedure (discussed in a separate article). It is incumbent on the District Court to analyze the Rule 23 factors carefully. General Telephone Co. of Southwest v. Falcon, 457 U.S. 152, 102 S.Ct. 2364 (1982) (reversing class certification for failure to analyze Rule 23 requirements). The question arises, however, whether the same rules apply when plaintiff(s) and defendant(s) seek class certification solely for purposes of settlement.

Prior to 1997, federal circuit courts of appeal were divided on whether Rule 23 applied strictly where the purpose of the motion for class certification was to effectuate the purposes of a proposed class settlement. The Fifth Circuit, for example, held that the requirements for class certification under Rule 23 need not be examined strictly if the ultimate purpose of the motion is to settle the dispute. See, In re Asbestos Litigation, 90 F.3d 963, 975-976, and n.8 (5th Cir. 1996). The Third Circuit, by contrast, held that while it was appropriate to certify a class solely for the purpose of class-wide settlement, Rule 23’s requirements still must be satisfied to the same extent as if the case were to be litigated. See, In re General Motors Corp. Pick-Up Truck Fuel Tank Products Liability Litigation, 55 F.3d 768, 799-800, cert. denied, 516 U.S. 824, 116 S.Ct. 88 (1995).

The United States Supreme Court resolved the issue in Amchem Products, Inc. v. Windsor, 521 U.S. 591, 117 S.Ct. 2231 (1997). There, the Supreme Court explained:

This case concerns the legitimacy under Rule 23 of the Federal Rules of Civil Procedure of a class-action certification sought to achieve global settlement of current and future asbestos-related claims. The class proposed for certification potentially encompasses hundreds of thousands, perhaps millions, of individuals tied together by this commonality: Each was, or some day may be, adversely affected by past exposure to asbestos products manufactured by one or more of 20 companies. Those companies, defendants in the lower courts, are petitioners here.

The United States District Court for the Eastern District of Pennsylvania certified the class for settlement only, finding that the proposed settlement was fair and that representation and notice had been adequate. That court enjoined class members from separately pursuing asbestos-related personal-injury suits in any court, federal or state, pending the issuance of a final order. The Court of Appeals for the Third Circuit vacated the District Court’s orders, holding that the class certification failed to satisfy Rule 23’s requirements in several critical respects. We affirm the Court of Appeals’ judgment.

521 U.S. at 597 (italics added).

The High Court examined the different weight to be afforded the requirements of Rule 23 when settlement, not litigation, is purposed:

Confronted with a request for settlement-only class certification, a district court need not inquire whether the case, if tried, would present intractable management problems, see Fed. Rule Civ. Proc. 23(b)(3)(D), for the proposal is that there be no trial. But other specifications of the Rule those designed to protect absentees by blocking unwarranted or overbroad class definitions demand undiluted, even heightened, attention in the settlement context. Such attention is of vital importance, for a court asked to certify a settlement class will lack the opportunity, present when a case is litigated, to adjust the class, informed by the proceedings as they unfold. See Rule 23(c), (d).

Id., at 620 (italics added). The Court also noted that “proposed settlement classes sometimes warrant more, not less, caution on the question of certification.” Id., n.16.

The Court found that the purposes of Rule 23 mandate compliance with its terms, even for purposes of settlement: “Subdivisions (a) and (b) focus court attention on whether a proposed class has sufficient unity so that absent members can fairly be bound by decisions of class representatives. That dominant concern persists when settlement, rather than trial, is proposed.” Id., at 621.

It is now clear, then, that a defendant must do more than give due care to the reasonableness of the terms of the proposed settlement. Even if the defendant negotiated the terms in good faith and the settlement will benefit the members of the proposed class, the defendant must consider also whether the requirements of Rule 23(a) and Rule 23(b) can be satisfied as part of the class certification motion filed in connection with any class-wide settlement proposal. The District Court is required to carefully evaluate both.