The Roles of the Players in Class Settlements. Part 3: The Judge

In the last two posts, I discussed the roles of two of the players in class settlements: defense counsel and class counsel. For the third and final installment in this series, I will discuss the role of the third and most important player: the judge.

No class settlement can happen unless approved by a judge. Because most of the people affected by a class settlement are absent class members who are not before the court and have no real relationship with any of the attorneys, the judge has a special responsibility to protect their interests. That responsibility arises because of the potential for a conflict of interest between the named plaintiff and the named plaintiff’s counsel, on the one hand, and the class members who will be bound by the settlement, on the other. The process for settlement approval is designed to protect those absent class members from the risk of collusion between and among the named parties, in other words, the risk that their interests will be compromised to effectuate a sweetheart deal between defendant, plaintiff, and class counsel.

In fulfilling this responsibility, the judge is required to review and determine the adequacy of the notice to be directed to the class, the fairness of the settlement to the class members, and the attorneys’ fees and costs to be paid to class counsel as part of the settlement. That process usually occurs in two steps.

Step One: Directing Notice to the Class

In the first step, after the Settlement Agreement has been executed, the named plaintiff’s counsel files a motion for “preliminary approval” of the settlement or, more accurately, for an order directing notice to the class. Under Federal Rule of Civil Procedure 23(e)(1)(B), the judge isn’t required to preliminarily approve the settlement at all. Rather, the only thing being approved (or not approved) is the notice, based on a finding that the court likely will, at a later time, be able to approve the settlement and certify the settlement class. Nevertheless, many lawyers continue to refer to this process as “preliminary approval,” and some also ask the court to conditionally certify the class.

The level of scrutiny judges apply to this notice-directing stage varies considerably. In my experience, it has ranged from judges (or in some cases, clerks) who enter the preliminary approval orders without any hearing, to judges who hold perfunctory hearings, to judges who hold substantive hearings consisting of oral argument at which they pose their questions about the settlement to counsel. One highly respected and conscientious judge I appeared before went so far as to require counsel to answer multiple sets of written questions to his satisfaction before he would even agree to schedule a “preliminary approval” hearing (and he made it clear that the issue was the direction of notice, not preliminary approval of the settlement).

Rule 23, of course, anticipates that this step of the process will be more than window dressing. As the Advisory Committee Notes to the 2018 Amendments to Rule 23 explain, “[t]he decision to give notice of a proposed settlement to the class is an important event.” The parties are expected to provide the court with sufficient information from which it can make the required findings, and federal judges are expected to conduct a meaningful review of the proposed settlement before authorizing notice. This “front-loading” of the settlement approval process makes sense, given the often significant costs and delay attendant to the lengthy notice process.

Step Two: Approval of the Proposal

Despite the importance of the first step in the settlement approval process, the second step, generally referred to as “final approval,” remains paramount. Rule 23(e)(2) provides: “If the proposal would bind class members, the court may approve it only after a hearing, and only on finding that it is fair, reasonable, and adequate . . . .” The rule then sets out the matters the court must consider in making that determination. They include the adequacy of representation by the class representatives and class counsel, whether the proposal was negotiated at arm’s length, the adequacy of the proposed relief, and whether the proposal treats class members equitably relative to each other. The rule also describes the factors to be taken into account in determining whether the relief is adequate.

The role of the judge, then, is to examine the evidence and arguments submitted in order to make these determinations. If no class member has objected to the proposed settlement, the judge usually does this based on the papers and oral argument. If one or more class members object, the judge must resolve the objection. Judges have discretion to do so either on the papers, through oral argument, or after an evidentiary hearing.

The judge entertaining a motion for final approval of a class settlement must consider not only the fairness of the settlement, but also whether a settlement class should be certified. Here, the judge is required to apply the certification requirements of Rule 23(a) and (b), although the settlement context creates some limited flexibility. If the court had certified a litigation class under Rule 23(b)(3) before the settlement was reached, Rule 23(e)(4) provides that “the court may refuse to approve a settlement unless it affords a new opportunity to request exclusion to individual class members who had an earlier opportunity to request exclusion but did not do so.”

When the court certifies the settlement class, it also must appoint class counsel, if it hasn’t done so already. The factors governing class counsel appointment are set out in Rule 23(g). Additionally, the court must make a determination about awarding class counsel’s requested attorneys’ fees and costs, as well as the service award for the named plaintiff. The fee request is often the focus of class member objections. Even if no objection has been filed, judges are expected to review the request, and may award amounts different from the amounts requested.

Conclusion

This post describes the basics of the judge’s role in the class action settlement process. Every case, and every settlement, is different, and raises its own set of complex issues for the judge to sort through. Through this blog, we will continue to address the many nuances of class action settlements generally, as well as important issues arising in specific cases.

The Roles of the Players in Class Settlements. Part 2: Class Counsel

In Part 1 of this series, I explained the role of defense counsel in class action settlements. In this Part 2, I will explore the role of class counsel. I embark on this journey with some trepidation, because as a defense counsel myself I have always been on the outside looking in to the plaintiff’s side of the class action settlement process. However, I have settled enough class actions that I believe I can speak with some authority on the issues, even if a few of the details might get a bit blurred in the process.

As a starting point, class counsel must tackle the same tasks I described in Part 1 — negotiating the key terms, drafting the agreement, and seeking court approval — but has the lead role with respect to the latter. Like defense counsel, class counsel need to seek the best deal they can extract from the other side and that, at a minimum, will pass muster when the court reviews its fairness, adequacy, and reasonableness for the class.

Unlike defense counsel, class counsel’s role is complicated by the multi-faceted interests they represent, including their own interest in being paid. They will file not only a motion for approval of the settlement, but also a motion for approval of their attorneys’ fees and expenses. The court will want to be satisfied that counsel did not compromise the interests of the class by using money that the court believes should have gone to the class to cover their own fees. For that reason, class counsel ordinarily will complete the negotiation of class relief before negotiating their fees. By keeping these two aspects of the negotiation separate, and pressing for the best deal they can accomplish for the class before discussing their fees with defense counsel, they can demonstrate to the court that they acted in class members’ best interests.

Before seeking court approval of the settlement, class counsel also must get the named plaintiffs that they represent to approve it. Although I have only represented defendants in class action litigation, I have represented plaintiffs in other types of cases, including a pro bono matter I handled for several years on behalf of dozens of residents of a low income neighborhood who suffered property damage from a common source. Ultimately, we settled that matter on a non-class basis, working closely with a client leadership group and communicating major developments to the rest of our clients before arriving at final settlement terms. In the class action context, counsel’s job dealing with a single class representative or a small group of class representatives should be more or less the same, requiring close connections and good relationships with the named plaintiffs through meaningful and appropriately timed communications.

In addition to working with named plaintiffs to arrive at fair settlement terms, class counsel may have to communicate with class members who have questions about or objections to the proposed settlement. Class counsel’s role in communicating with such class members is largely the same as a defendant’s role when the defendant seeks to communicate with members of a not-yet-certified class, namely, to provide information truthfully, in a manner that is neither misleading nor coercive. Indeed, class counsel has a heightened responsibility to such persons because of the fiduciary relationship that will arise from their attorney-client relationship with class members once the class is certified.

Where more than one settlement class is proposed, class counsel also must ensure that each class is properly represented. In some cases, that may require designating separate class counsel for each class or subclass, which will help avoid any questions about the adequacy of representation for purposes of Rule 23(a)(4). Many class actions are brought by teams of lawyers and law firms, and negotiations among the members of such teams regarding the allocation of class relief and attorneys’ fees can be as critical and potentially as challenging as the negotiations between lead counsel and the defendants.

Class counsel’s ultimate responsibility is to seek approval of the proposed settlement in order to obtain relief for the class. When I have served as defense counsel, I've expected class counsel to take the lead in moving both for preliminary and final approval of the settlement, and of course class counsel are solely responsible for getting the court to approve their fees and expenses. In most cases, class counsel also bear primary responsibility for handling any appeals from the court’s final approval order, especially if the appeal challenges the fee award.

In sum, the multi-faceted nature of class counsel’s responsibilities makes their role in the settlement process more complex than the role of defense counsel. Class counsel who bring experience and professionalism to bear on the various tasks are most likely to succeed at navigating the shifting currents of the class settlement process.

The Roles of the Players in Class Settlements. Part 1: Defense Counsel

Class action settlements are different from other settlements for several reasons. The most obvious difference is that class action settlements are subject to a unique notice and court approval process. The overriding purpose of the process is to ensure fairness to members of the class. Judicial oversight is deemed necessary because most class members have little knowledge of the lawsuit and are unknown to plaintiffs’ counsel yet will be bound by the decisions counsel make on their behalf.

The nature of class action settlements and the process to which they are subject fundamentally alter the roles of counsel and the court. This post and the ones that follow will explore these altered roles. We will start with the simplest one – the role of defense counsel.

Examining the role of defense counsel in a class action settlement is simplest because, unlike plaintiffs’ counsel, defense attorneys generally possess no potential conflict of interest in the settlement approval process. Their duty to their clients remains undivided throughout the proceedings, subject only to their ethical duties and responsibilities as officers of the court. The role takes on different forms in the three key stages of settlement: negotiating the key terms of settlement, drafting the settlement agreement, and seeking settlement approval.

Negotiating the Key Terms

The goal of defense counsel in the settlement negotiation is straightforward: negotiate the best possible deal for their client. However, the best possible deal in a class settlement may not be the same as the best possible deal in a private one. It must be a deal that a court will view as fair, adequate, and reasonable for class members. For this reason, a defendant that wants to achieve a class-wide settlement cannot adopt a take-no-prisoners approach to the settlement terms. Defense counsel’s duty to their clients certainly demands that they press hard to achieve their clients’ business objectives on favorable terms, but they must remember, and may need to remind their clients, that getting plaintiffs’ counsel to accept their terms is only the beginning, not the end, of the process. A defendant that overreaches by demanding terms that are objectively unreasonable and unlikely to be approved puts the entire settlement, and all of the substantial time and expense incurred in pursuing it, at risk.

While plaintiffs’ counsel have their own obligation not to sell the class down the river, experienced defense counsel, knowledgeable about the types of settlement terms courts favor and those courts disfavor, also must be prepared to advise their clients when they are pushing too hard for terms that are unlikely to gain court approval or withstand possible appellate review. And, as a corollary, if plaintiffs’ counsel are inexperienced or inattentive, defense counsel may have to make an extra effort to ensure that plaintiffs’ counsel are not requiring terms or making procedural errors that could create or perpetuate conflicts among settlement class members or between the class and counsel that could put the settlement at risk.

Drafting the Written Agreement

After the key terms are agreed upon, counsel for both sides begin work on the written settlement agreement and all of its exhibits (such as the class notices). Which side takes the lead on the initial draft will vary depending on the case and the parties’ inclinations, but ultimately the drafting represents the collective effort of the now more closely aligned interests. Until the agreement is reduced to a signed writing, of course, counsel must still be vigilant to protect and advance their clients’ interests, and there typically will be disagreements along the way. Still, in this phase counsel for both sides can work through their disagreements knowing that they share the ultimate goal of getting the deal done.

The settlement agreement will contain some standard boilerplate, but much of it will need to be customized in accordance with the basic terms that have been agreed upon and tailored to the needs of the particular case. For defendants, the most important provisions of a class action settlement are the class definition and the release, and counsel will need to pay careful attention to their scope and wording. Despite the more friendly nature of the parties’ relationship in this phase of the case, the need for counsel to be alert to the many complex details of the written agreement make it common for this drafting process to take longer than expected. Defense counsel should do their best to work efficiently with their client and with class counsel to avoid unreasonable delays.

Seeking Court Approval

Once the parties have reached agreement on settlement terms and prepared the written agreement, their posture towards each other and towards the court fundamentally changes. Originally opposed, their interests in obtaining approval are now aligned, though the burden rests primarily on class counsel. Defense counsel typically assume a more passive role in this third stage of the process, focused primarily on making sure that everyone else is fulfilling their responsibilities, such as meeting the settlement agreements’ deadlines for court filings, notice mailings, and settlement account funding. Defendants may choose (and, in my opinion, are usually well advised) not to join in the motions for preliminary or final approval, but counsel will want to review and have input on drafts of class counsel’s motions, supporting memoranda, and declarations before they are filed. Their purposes in doing so include making sure that class counsel’s filings accurately describe the settlement and the defendants’ positions, and sufficiently demonstrate to the court that the settlement requirements of Rule 23 (or applicable state rule) have been satisfied.

Defense counsel also will want to make sure, both in the settlement agreement and through class counsel’s filings, that the documents cannot be interpreted to reflect an admission by defendant that the requirements for certification of a litigation class are met, in the event that the settlement is not approved and the parties are returned to their adversarial positions. As with the motion papers, class counsel ordinarily should take the lead in court in arguing for approval, with defense counsel standing by fully prepared to respond to any questions or concerns raised by the court that they are in a better position than class counsel to answer.

If objections are filed, defense counsel also should be prepared to support class counsel in responding to them. Similarly, if the court decides to conduct an evidentiary hearing to entertain objections, defense counsel should assist class counsel in the conduct of the hearing to the extent appropriate to the case. Defense counsel also should coordinate with class counsel in briefing and/or arguing any appeal from the trial court’s settlement decision.

Conclusion

In sum, defense counsel’s role in the class action settlement process is significantly different from their role in negotiating a private settlement agreement. Counsel must keep their eyes on several moving pieces, always working diligently to protect their clients’ interests, yet never forgetting that it is the court that decides whether the settlement will occur.

This post originally appeared in the blog Class Action Settlements and Mediation, published by the author's former law firm, Pierce Atwood LLP.