General Publications June 28, 2019

“Courts Are More Rigorously Scrutinizing Class Settlements,” Law360, June 28, 2019.

Extracted from Law360

A controversial 2018 Ninth Circuit opinion resulted in much consternation for parties seeking to obtain court approval of nationwide class action settlements by requiring those parties to demonstrate how variations in state law would not bar certification of a settlement class.

Many have commented that such a requirement would be a nearly insurmountable bar to the approval of nationwide class settlements. Earlier this month, an en banc panel of the U.S. Court of Appeals for the Ninth Circuit reversed that 2018 decision, holding that settling parties were not required to proffer such an analysis of state-law variations for purposes of seeking certification of a settlement class.

While the Ninth Circuit’s en banc decision eases the burden on settling parties seeking approval of nationwide class settlements, settling parties still have plenty of hurdles to overcome on the road to final approval. It has become increasingly clear over the past several years that federal courts, after the mandate in Wal-Mart Stores Inc. v. Dukes,[1] are conducting a rigorous analysis to determine whether the Federal Rule of Civil Procedure 23 requirements are satisfied in the nonsettlement class context.

Against this backdrop, federal courts are also embracing a rigorous analysis of the requirement from Amchem Products Inc. v. Windsor[2] that the settlement class and claims satisfy the Rule 23 elements, including the commonality and Rule 23(b)(3) predominance elements.

Furthermore, the actual terms of nationwide class settlements continue to be subject to the recent trend of rigorous scrutiny by federal courts. Federal courts across the country have undertaken a much closer inspection of the actual benefits conferred on settling class members to assess whether the proposed settlement is, in fact, fair, reasonable and adequate.

Ninth Circuit’s Recent En Banc Reversal of Controversial 2018 Ruling

In 2015, the U.S. District Court for the Central District of California granted class certification and final approval of a nationwide settlement of a class action lawsuit involving claims for violation of various state consumer protection laws. The final approval was subsequently appealed and a three-judge panel of the Ninth Circuit vacated the final approval in 2018, holding that the district court failed to analyze whether state-law variations would predominate under Rule 23.

The Ninth Circuit subsequently heard the appeal en banc in In re Hyundai Motor America Inc. and Kia Motors America Inc. Fuel Economy Litigation.[3] On the issue of whether the district court failed to consider variations in state law in certifying a settlement class, the panel noted that “a court adjudicating a multistate class action is free to apply the substantive law of a single state to the entire class.”

In particular, the panel stated that “California courts apply California law ‘unless a party litigant timely invokes the law of a foreign state,’ in which case it is ‘the foreign law proponent’ who must ‘shoulder the burden of demonstrating that foreign law, rather than California law, should apply to class claims.’”

According to the panel, in order to satisfy this burden, the objectors were required to prove that “(1) the law of the foreign state ‘materially differs from the law of California,’ meaning that the law differs ‘with regard to the particular issue in question’; (2) a ‘true conflict exists,’ meaning that each state has an interest in the application of its own law to ‘the circumstances of the particular case’; and (3) the foreign state’s interest would be ‘more impaired’ than California’s interest if California law were applied.” Thus, the en banc panel placed the burden on the objectors, as the proponent of foreign law, to proffer an analysis of state law variations.

The panel found that the objectors failed to meet their burden of demonstrating that the application of California law gave rise to constitutional issues. No objector presented “an adequate choice-of-law analysis or explained how, under the facts of this case, the … three elements were met.” Moreover, no objector argued that state variations in consumer protection laws precluded certification of a settlement class. As a result, the en banc panel upheld the district court’s approval of the settlement and reversed the Ninth Circuit’s original decision.

Rigorous Scrutiny of Class Settlements Remains the New Rule

While the Ninth Circuit’s en banc decision might suggest a new direction toward an alleviated burden of obtaining judicial approval of class settlements, several decisions over the past several years demonstrate that courts are generally trending toward a more demanding review of the terms of class action settlements. This trend includes, for example, a careful examination of the terms of the proposed class action settlement, the relief provided to class members in relation to the gravity of their claims and class counsel fees.

Most recently, in In re Yahoo! Inc. Customer Data Security Breach Litigation,[4] the plaintiffs filed a class action lawsuit against Yahoo alleging three separate data breaches. The parties came to a settlement that required Yahoo to pay $50 million and provide two years of free credit-monitoring services to 200 million people whose email addresses and personal information were exposed in an alleged data security breach.

After closely scrutinizing the terms of the settlement, including the form of notice, claims released, and the overall protection of Yahoo’s data moving forward, the court found that the settlement was not fundamentally fair, reasonable or adequate.

The court concluded that the class notice failed to provide reasonable notice that the agreement released class claims arising out of the 2012 data breach and only referenced the 2013, 2014 and 2015-2016 breaches. Therefore, the release of the 2012 data breach claims was overbroad.

Further, the agreement did not commit to any specific increase in budget or number of employees to improve information security and only provided vague assurances about business practice commitments. Finally, the court found class counsel’s fees to be unreasonably high and thus created a potential reverter to defendants rather than to the benefit of the class.

Another recent Northern District of California class action settlement was subject to rigorous scrutiny and disapproved. In In re MyFord Touch Consumer Litigation,[5] the plaintiffs filed a class action lawsuit against Ford Motor Company alleging that it sold faulty touchscreens with their vehicles.

In the settlement reached between the parties, Ford would provide a free upgrade to the subject touchscreen operating system, a claims-made settlement for monetary damages of up to $55 million, and a clear-sailing agreement for a request of up to $22 million in attorney fees.

The court found that the proposed settlement was not fair, reasonable and adequate. The court determined that the free upgrade had no monetary value because it was never established that the upgrade would fix the faulty touchscreens.

Moreover, the court rejected a claims-made settlement approach because Ford had a method of identifying class members, and a claims-made approach typically has a low redemption rate and payout compared to a direct settlement payment to class members. As a result, the court found that the settlement value was likely closer to $5 million in class benefit, and thus the attorney fees award of $22 million was found to be “grossly disproportionate.”

The same trend toward greater scrutiny of class settlements has also been true in recent years at the circuit court level. For example, in In re Subway Footlong Sandwich Marketing and Sales Practices Litigation,[6] the plaintiff sued Subway for injunctive relief after discovering that “foot-long” Subway sandwiches were only 11 inches.

The district court approved a class settlement that provided injunctive relief, $520,000 in class counsel fees and $500 to each class representative. For injunctive relief, Subway agreed to use a tool to measure sandwiches and ensure that its foot-long sandwiches would be at least 12 inches long and would implement compliance procedures to ensure the length of the sandwich moving forward.

An objector appealed the settlement to the U.S. Court of Appeals for the Seventh Circuit, arguing that the settlement did not benefit the class in any meaningful way. The Seventh Circuit agreed, noting that “despite the new measuring tools, protocols, and inspections—there’s still the same small chance that Subway will sell a class member a sandwich that is slightly shorter than advertised … because of the inherent variability in food production and the bread baking process.”

This “small chance” was inherent regardless of the compliance procedures since a “simple comparison of the state of affairs before and after the settlement” showed that Subway could not guarantee 100% of the time that its sandwiches would be 12 inches or greater in length. Therefore, a close scrutiny of the actual terms of the settlement revealed that there was no resolution to the very complaint of the class members, and the Seventh Circuit reversed the settlement’s approval.

The Ninth Circuit also recently reversed the approval of a class settlement. In Koby v. ARS National Services Inc.,[7] the plaintiffs filed a class action against a debt collection agency under the Fair Debt Collection Practices Act, alleging that the agency violated the FDCPA by leaving voicemail messages that failed to disclose that they worked for a debt collection agency and that the purpose of the call was to collect a debt. In the settlement agreement, the agency agreed to pay each of the three named plaintiffs $1,000, a $35,000 cy pres award to a local charity, and class counsel fees of $67,500.

The settlement also provided for injunctive relief that required the agency to make certain disclosures in future voicemails for a period of two years. An objector challenged the settlement, asserting that the settlement was unfair and unreasonable because class members would waive their right to pursue class damages without receiving any monetary compensation.

The Ninth Circuit reversed the approval of the class settlement because there was “no evidence that the relief afforded by the settlement has any value to the class members, yet to obtain it they had to relinquish their right to seek damages in any other class action.”

In particular, not only were absentee class members not obtaining any monetary relief, but the injunctive relief afforded was worthless to them since the class “was defined to include those who had suffered a past wrong at ARS’s hands.” The Ninth Circuit concluded that injunctive relief that addresses the agency’s future conduct would not appropriately redress the class members’ past harms.

Taken together, these recent cases suggest that courts continue to undertake a much closer inspection of the actual benefits conferred on settling class members. While the Ninth Circuit’s recent en banc ruling clarifies that variations in state law will not preclude the certification of a settlement class, settling parties and their counsel should continue to be mindful of the rigorous scrutiny of the terms of class action settlements that federal courts have employed in recent years.

Thus, although the hurdles to certification of a settlement class are not as high as they were last year, the hurdles of demonstrating that a class action settlement is fair, reasonable and adequate under Rule 23 still remain and arguably trend higher as courts closely scrutinize the actual terms of the settlements and the benefits to the class. This trend, along with the trend of federal courts embracing a more rigorous analysis of the Rule 23 elements, will continue to challenge settling parties and make the road to final approval more difficult in the years to come.

[1] Wal-Mart Stores, Inc. v. Dukes, 131 S. Ct. 2541 (2011).

[2] Amchem Prods., Inc. v. Windsor, 521 U.S. 591, 620 (1997).

[3] In re Hyundai & Kia Fuel Econ. Litig., 2019 U.S. App. LEXIS 17047 (9th Cir. 2019).

[4] In re Yahoo! Inc. Customer Data Sec. Breach Litig., No. 5:16-md-02752, 2019 U.S. Dist. LEXIS 15034, at *63 (N.D. Cal. Jan. 30, 2019).

[5] In re MyFord Touch Consumer Litig., No. 13-cv-03072, 2018 U.S. Dist. LEXIS 100222, at *10 (N.D. Cal. June 14, 2018).

[6] In re Subway Footlong Sandwich Mktg. & Sales Practices Litig., 869 F.3d 551 (7th Cir. 2017).

[7] Koby v. ARS National Servs., 846 F.3d 1071, 1079 (9th Cir. 2017).
Meet the Authors
Media Contact
Alex Wolfe
Communications Director

This website uses cookies to improve functionality and performance. For more information, see our Privacy Statement. Additional details for California consumers can be found here.