In the

United States Court of Appeals

For the Seventh Circuit

Nos. 12-1157, 12-1158, 12-1186,

12-1730, 12-1753 & 12-1764

SAFECO INSURANCE COMPANY OF AMERICA, et al.,

Plaintiffs-Appellants,

and

LIBERTY MUTUAL INSURANCE CO., et al.,

Counterclaimants-Appellants,

and

ACE INA HOLDINGS, INC., et al.,

Intervening Plaintiffs-Appellees/

Defendants-Appellees,

v.

AMERICAN INTERNATIONAL GROUP, INC., et al.,

Defendants-Appellees/Plaintiffs-Appellees/

Counterdefendants-Appellees.

Appeals from the United States District Court

for the Northern District of Illinois, Eastern Division.

Nos. 07 C 2898 & 09 C 2026—Robert W. Gettleman, Judge.
2 Nos. 12-1157, et al.

ARGUED NOVEMBER 29, 2012—DECIDED MARCH 25, 2013

Before EASTERBROOK, Chief Judge, and POSNER and

MANION, Circuit Judges.

EASTERBROOK, Chief Judge. About 45 days after these

appeals had been argued, the appellants asked us to

dismiss them, see Fed. R. App. P. 42(b), informing the

court that the dispute had been settled. All but one of

the appellees (ACE INA Holdings) joined a stipulation

of dismissal; ACE did not join it, but neither does it

oppose dismissal. Because the litigation is a class action,

however, we were concerned that the settlement might

have adverse effects on other members of the class. So

we asked for additional memoranda. These have been

filed, and in the two months that have elapsed since the

notice no member of the class has expressed opposition. Having concluded that the settlement does not

jeopardize the interests of the unrepresented class members, we dismiss the appeals.

The first sentence of Rule 42(b) provides that, if all

parties agree to an appeal’s dismissal, then the clerk of

court may close the proceeding without judicial action.

ACE did not join the stipulation, so the second sentence

of Rule 42(b) applies: “An appeal may be dismissed on

the appellant’s motion on terms agreed to by the parties

or fixed by the court.” This sentence uses “may” rather

than “must” so that the judges can protect the rights

of anyone who did not consent to the dismissal. Although
Nos. 12-1157, et al. 3

the members of the class are not technically parties,

they have legally enforceable interests. See Devlin v.

Scardelletti, 536 U.S. 1 (2002).

Companies underwriting workers’ compensation insurance participate in a reinsurance pool administered

by the National Workers Compensation Reinsurance

Association (the Association). Insurers share in the pool’s

profit or loss according to the volume of business they

underwrite. When the pool is profitable, it is beneficial

to have a larger book of business; when the pool loses

money, a smaller book means that the underwriter

needs to contribute less toward the losses. The class in

this suit contends that American International Group

(AIG) underreported the size of its business in losing

years, causing the pool’s other members to bear a

disproportionate share of the losses. The class asked

for about $3.1 billion.

Some of the insurers had other business dealings.

Liberty Mutual and its affiliates, including Safeco, have

independent claims against AIG. For its part, AIG advanced claims against Liberty Mutual (as we call the

entire group). When Liberty Mutual caused Safeco to

commence this class action as the representative plaintiff, these other claims complicated the litigation. Once it

became evident that Liberty Mutual had unacceptable

conflicts, ACE INA Holdings intervened, with several

other insurers, to take over as the class’s representatives.

Still, Liberty Mutual sought to use the class suit as a

club to induce AIG to pay more on its separate claims

against AIG, while AIG sought to minimize the sum
4 Nos. 12-1157, et al.

of what it paid the class plus what it owed Liberty

Mutual separately.

ACE (and the other new representatives, which we

ignore from here on) eventually settled the class claims

against AIG for $450 million. The settlement includes

releases of all claims that pool members held against AIG

in all lines of business (not just reinsurance of workers’

compensation policies), plus releases of AIG’s claims

against the class’s members. Liberty Mutual protested;

it contended that its 22% share of the settlement

(some $99 million) is too small, given the value of its

independent claims against AIG. The settlement provides that any class member can opt out, and ACE anticipated that Liberty Mutual would do so. The settlement

agreement provides that, if Liberty Mutual were to opt

out, AIG’s payment would be reduced to $351 million.

Liberty Mutual elected to stay in the class. So did all

but one other insurer. The district judge approved the

settlement after a hearing under Fed. R. Civ. P. 23(e). 2012

U.S. Dist. LEXIS 25265 (N.D. Ill. Feb. 28, 2012). Liberty

Mutual then appealed, arguing in this court that its

share of the settlement does not compensate it

adequately for the value of its stand-alone claims

against AIG. It also contended that the conflicts of

interest within the reinsurance pool meant that the case

never should have been certified as a class. (This argument appears in Safeco’s brief rather than Liberty Mutual’s, but as they are under joint control the main effect

of filing separate briefs is to get extra words. None of

the other parties contends that Safeco should be viewed
Nos. 12-1157, et al. 5

as independent of its parent; after all, this is why Safeco

was not a satisfactory class representative.) Appellants

made some other arguments, which need not be described. None of the insurers outside the Liberty Mutual

group complained about the class certification or the

settlement, and the Association, on behalf of the entire

pool, supported the district court’s decision.

After argument, Liberty Mutual settled with AIG.

The terms of the settlement do not matter to the other

members of the class, who still split $351 million among

them. ACE and the other representatives are content.

Neither the Association (which manages the pool) nor

any member of the class has protested. It is accordingly

hard to see how a live controversy remains, and courts

should not issue opinions resolving litigation that

the parties no longer want to pursue. Since no one now

wants us to adjudicate this dispute—or even suggests

that there is a “dispute” left to adjudicate—dismissing

the appeals is in order. Cf. U.S. Bancorp Mortgage Co. v.

Bonner Mall Partnership, 513 U.S. 18 (1994).

We have considered, in the spirit of Rule 23(e),

whether this settlement has any potential to injure nonparticipants. Yet all of the pool’s members outside the

Liberty Mutual group still get exactly what they

accepted before—and the district court found that resolution fair. Liberty Mutual’s appeal principally concerns the way the district court’s order affects its own

claims against AIG. That’s something Liberty Mutual

had every right to resolve independently by opting out.

A settlement between Liberty Mutual and AIG while
6 Nos. 12-1157, et al.

the appeal was pending works as a belated opt-out,

which has no greater potential to injure the pool’s other

members than an opt-out before the district court acted

would have done. If, under the settlement, opt-out by

Liberty Mutual meant undoing the pact and continuing

the litigation, then a de facto opt-out on appeal might

justify a remand. But the possibility of Liberty Mutual

opting out and reaching a side deal with AIG was provided for in the settlement itself. That this possibility

now has been realized does not call into question the

settlement’s fairness to the pool’s other members.

Could Liberty Mutual’s appeal itself have injured

other members of the class—perhaps by leading them to

think that they needn’t file their own appeals? That is

very unlikely, for three reasons.

First, what issues would other class members have

raised on appeal? None had complained about the settlement, so there was no adverse decision to appeal from.

Second, why would Liberty Mutual’s appeal have dissuaded another insurer from appealing? Any other firm

could see that Liberty Mutual was appealing to defend

its separate interests; none would have relied on Liberty

Mutual. The established conflict between Liberty Mutual

and the rest of the class is why ACE intervened to take

over as the representative plaintiff. Other members of the

class would have seen Liberty Mutual as a threat to their

interests, not as a champion they could rely on for protection. Recall that Liberty Mutual asked us to abrogate the

class certification, a step that would have eliminated the

other insurers’ recoveries.
Nos. 12-1157, et al. 7

Third, Liberty Mutual waited until the end of the window for appeal. The judgment was entered on February 28, 2012, and the appeals were filed on March 27.

No other insurer could have been safe in waiting to

see whether Liberty Mutual would appeal; a pool

member that wanted appellate review would have

acted on its own before March 27. Liberty Mutual would

not have violated any other insurer’s rights by settling

with AIG on March 26 and never filing an appeal; filing

an appeal at the end of the available time and settling

later has no greater potential to injure other members

of the class.

Although we appreciate that conflicts of interest

between representative plaintiffs and class members

can lead the representatives to sell out for too little, no

one has accused ACE of yielding to that temptation.

All members of the class are large and sophisticated

businesses, many with millions on the line and

legal staffs to protect their interests. Even the smaller

insurers receive more than $100,000 from the settlement, and if the representatives had been able to

negotiate for the $3 billion the class initially sought,

the average return per insurer would have exceeded

$2 million (and about $750,000 apiece for the smaller

insurers). The pool is a multi-billion-dollar business;

its manager, which looks out for the aggregate of all

members’ interests, supports both the original settlement and the dismissal of Liberty Mutual’s appeal. The

Manual for Complex Litigation §21.61 (4th ed. 2004),

provides a list of events that may tip off the judiciary to
8 Nos. 12-1157, et al.

a problem; none of the things to watch for has occurred

in this suit.

Because there is no prospect of injury to any other

class member, we need not discuss at length this statement in the committee note to the 2003 amendment to

Rule 23(e): “Once an objector appeals, control of the

proceeding lies in the court of appeals. The court of

appeals may undertake review and approval of a settlement with the objector, perhaps as part of appeal

settlement procedures, or may remand to the district

court to take advantage of the district court’s familiarity with the action and settlement.” The committee note does not discuss any particular language

in Rule 23, which like the other civil rules deals with

proceedings in district courts rather than courts of appeals. All the committee’s statement does is recognize

that the court of appeals will decide what to do.

For the reasons we have given, we do not think any

further proceedings necessary.

If despite appearances this settlement makes other

class members worse off or disappoints their reasonable

expectations, a class member could file a motion in the

district court under Fed. R. Civ. P. 60(b)(3) (misconduct

by an opposing party) or 60(b)(6) (“any other reason

that justifies relief”). If such a motion were to be filed,

a concrete controversy would call for judicial resolution. At the moment, however, none of the parties

wants to fight, and none of the class members has expressed dissatisfaction. Any further proceedings would

be gratuitous. The appeals are dismissed.
Nos. 12-1157, et al. 9

POSNER, Circuit Judge, dissenting. Dismissal of the

appeal in this class action suit is premature. It is based

on speculation rather than on evidence, is insensitive

to the risks of class action sell-out, and makes critical

errors.

We don’t know the terms of the settlement on which

dismissal is predicated, so we don’t know whether the

settlement sells out the interests of the class. But it

may. In discounting that possibility the majority

opinion makes two critical errors. The first is to say

that “any other firm [that is, any other class member]

could see that Liberty Mutual was appealing to defend

its separate interests; none would have relied on

Liberty Mutual.” Yet two subsidiaries of Liberty had

submitted a separate appellate brief, arguing that the

conflict between class members that were sued by AIG

and those that weren’t required division of the class

into subclasses, each with separate counsel. That

was an argument on behalf of class members who

were unrelated to the Liberty group.

The second mistake in the majority opinion is related:

it is the statement that “all members of the class are

large and sophisticated businesses, many with millions

on the line and legal staffs to protect their interests. Even

the smaller insurers receive more than $100,000 from

the settlement, and if the representatives had been able

to negotiate for the $3 billion the class initially sought,

the average return per insurer would have exceeded

$2 million (and about $750,000 apiece for the smaller

insurers).” There are 1363 class members, and 55 percent

of the settlement goes to just four of them, leaving
10 Nos. 12-1157, et al.

$202 million to be divided among the other 1359. That is

an average of only $148,638.87 apiece. It implies that

many of the claims probably are much smaller. There is

no basis for the assertion that all the insurers will

receive at least $100,000 from the settlement, and no basis

for estimating the maximum likely settlement.

Some class members had been countersued by AIG,

but others had not been. The brief filed by Liberty’s

subsidiaries argued that those who had not been had

been undercompensated by the settlement because

there was no reason to offset their claims by AIG counterclaims. Those class members might have relied on

the brief of Liberty’s subsidiaries to advance this

argument, foregoing the expense of filing their own

appeals from the class action and their own appeal

briefs because their own claims may not have been

large enough to justify the expense—and anyway why

incur it when they had a champion, namely Liberty?

And remember that, as far as we know, the class members have not been informed of the settlement of the

appeals or of the motion to dismiss them. And so the

appellate settlement may be a device by which AIG

paid Liberty to desert the class on whose behalf (as well

as its own) it purported to be appealing.

Rule 42(b) of the appellate rules does not require dismissal if the rule’s conditions for dismissal are satisfied;

it says the court “may” dismiss if they are. Further

process is necessary in this case before dismissal can

be considered the responsible course for us to take. The

class action device, as a substitute for individual suits

or conventional joinder, can achieve economies in multi-
Nos. 12-1157, et al. 11

party litigation and allow victims of wrongful acts to

obtain legal relief they couldn’t otherwise obtain. But

class actions are also rife with distorted incentives and

conflicts of interest, which makes judicial review of

class action settlements, whether at the trial or the appellate level, vital.

This class action suit charged AIG with having

cheated other companies that write workers’ compensation insurance (the class members) and are required by

state statutes to contribute to a workers’ compensation

insurance liability pool (analogous to an assigned-risk

pool for automobile liability insurance). Employers who

cannot find an insurer willing to write them a workers’

compensation insurance policy because their business

involves a high risk of injury to their employees obtain insurance from the pool.

Allocation of the cost of the liability pool among its

members is based on the amount of workers’ compensation

insurance that each member writes willingly. The suit

charged that AIG cheated the other members of the pool by

underreporting the premiums it received for the

workers’ compensation insurance that it wrote willingly. Its underreporting is alleged to have caused the

class members to pay a portion of what should have

been AIG’s contribution to the pool. Liberty, one of the

class members, became the named plaintiff and sought to

become the class representative. Actually it designated

two of its subsidiaries to be the named plaintiffs—the

two subsidiaries that filed the separate appellate brief

that I mentioned.
12 Nos. 12-1157, et al.

AIG responded by filing suits against a number of

the members of the class, including Liberty, charging

that they were cheaters too, because they too had

underreported their premiums from the insurance

they sold willingly. Liberty responded by filing counterclaims against AIG in AIG’s suit against it. The counterclaims accused AIG of having underreported premiums

in a number of states not involved in the class action.

Liberty is the only member of the class that has

individual as well as class claims against AIG.

AIG agreed to pay $450 million to the class to settle

both the class claims and Liberty’s individual claims.

Liberty wanted more. It argued that its counterclaims

gave it leverage over AIG that should make AIG agree

to a more generous settlement, because a settlement

would buy AIG peace in the form of a release of those

counterclaims. Liberty wanted to be compensated for

selling AIG that peace. But it didn’t want just a bigger

share of $450 million. It argued that AIG’s offer to the

class was far too low, and not only because of the value

Liberty assigned to its counterclaims. It wanted AIG

to agree to pay $3.1 billion in settlement of the class

action, of which $700 million would go to Liberty

instead of a mere $99 million, its share of the $450

million ultimately awarded in the settlement. Of course

if AIG could be forced to pay $3.1 billion, all the class

members—not just Liberty—would be better off. But

AIG was unwilling.

With Liberty holding up settlement by its intransigence,

ACE INA Holdings, Inc. and six other class members

intervened in the district court, becoming parties. They
Nos. 12-1157, et al. 13

were appointed class representatives for a settlement

class, accepted AIG’s $450 million settlement offer, and

asked the district judge to approve the settlement,

which he did.

Only one class member objected to certification of the

settlement class and ultimately to the settlement itself—Liberty. Its objections, renewed in these appeals

that the majority has decided to dismiss blind, were not

only that the settlement was too small but also, as I mentioned earlier, that the allocation of the $450 million

among class members ignored the fact that some of them

had been targets of counterclaims by AIG. Their share of

the settlement should have been offset to reflect the value

to them of AIG’s releasing those counterclaims, while the

share received by the class members who had not been

targets of AIG’s counterclaims should have been correspondingly increased—but were not. Instead the settlement money was divided in proportion to each class

member’s share of the liabilities that it had incurred as a

result of AIG’s misconduct, without any offsets. That is the

basis of the argument advanced by Liberty’s subsidiaries

in their separate brief that the judge should have created

two subclasses with separate counsel, one for the members

who were named in AIG’s counterclaims (and thus benefited from the release of those counterclaims, which was

part of the settlement) and the other for those class members who weren’t. Representation of a class by one plaintiff

or one group of plaintiffs is inadequate under Fed. R. Civ.

P. 23(a)(4), (g)(4) if there is a potential dispute between

factions within the class over allocation of settlement

proceeds. Ortiz v. Fibreboard Corp., 527 U.S. 815, 856-59
14 Nos. 12-1157, et al.

(1999); Amchem Products, Inc. v. Windsor, 521 U.S. 591, 625-

28 and n. 20 (1997); In re Literary Works in Electronic Databases Copyright Litigation, 654 F.3d 242, 249-53 (2d

Cir. 2011).

Liberty’s unique individual claim to have been underpaid in the settlement because it was forced to release

its counterclaims against AIG too cheaply has been resolved by the settlement with AIG of Liberty’s appeal.

The money for that settlement—the money AIG is

paying to persuade Liberty to drop its appeal—will not

come out of the $450 million of class settlement

money. Were it the only claim, therefore, summary dismissal of Liberty’s appeal under Fed. R. App. P. 42(b)

would be proper. But since it’s not the only claim, to

allow Liberty's subsidiaries to withdraw their objection to

the size of the settlement and to the alleged misallocation

of settlement proceeds among the remaining class members could deny the class a shot at a larger and more

equitably distributed settlement. If, pursuant to Liberty’s

submission, AIG paid $3.1 billion in settlement, of which

$700 million went to Liberty, $2.4 billion would go to

the rest of the class rather than the $351 million

($450 million minus $99 million) that it will receive if

the settlement approved by the district court stands.

As amended in 2003, Fed. R. Civ. P. 23(e) (in what is

now subsection (e)(5)) says that “an objection [to a class

action settlement] may be withdrawn only with the

court’s approval.” As the committee note points out, the

logic of the rule applies to the withdrawal of an objection on appeal. “Once an objector appeals, control of the
Nos. 12-1157, et al. 15

proceeding lies in the court of appeals. The court of

appeals may undertake review and approval of a settlement with the objector, perhaps as part of appeal settlement procedures, or may remand to the district court

to take advantage of the district court’s familiarity with

the action and settlement.” 2003 Committee Notes to

Fed. R. Civ. P. 23(e). My concern is that the opposition

of Liberty’s subsidiaries to the settlement may have led

other members of the class not to appeal the allocation of the settlement proceeds, trusting that someone

(namely the Liberty group) was carrying that ball for

them. Class counsel, it is true, is not objecting to the

dropping of the appeal. But if class counsel could

always be trusted to be the loyal and competent representative of the class, there would be no requirement

that class action settlements be submitted for approval

by a court, with approval dependent on the outcome of

a hearing to determine the fairness of the settlement to

the class. “We and other courts have often remarked the

incentive of class counsel, in complicity with the defendant’s counsel, to sell out the class by agreeing with

the defendant to recommend that the judge approve a

settlement involving a meager recovery for the class

but generous compensation for the lawyers—the deal

that promotes the self-interest of both class counsel and

the defendant and is therefore optimal from the standpoint of their private interests.” Creative Montessori

Learning Centers v. Ashford Gear LLC, 662 F.3d 913, 918

(7th Cir. 2011).

For all we know, the amount that AIG has agreed

to pay Liberty to drop its appeal is not just an estimate
16 Nos. 12-1157, et al.

of the value of Liberty’s individual claim beyond its

share of the class action settlement, but includes a “bribe”

given to Liberty by AIG to take the issue of equitable

allocation of settlement proceeds among class members

out of contention because the issue if taken up by the

appellate court (by us, that is) might be resolved

against approving the settlement. I have pointed out

that members of the class who are disappointed by the

existing allocation may have been counting on Liberty

to champion their cause in this court. But class action

settlements require judicialreview (the “fairness” hearing)

even when there are no objectors, in recognition of the

conflicts of interest that pervade class action litigation.

Fed. R. Civ. P. 23(e), (e)(2); 4 William B. Rubenstein et al.,

Newberg on Class Actions §11:48 (4th ed. 2012) (“despite

a lack of opposition, the court should not lose sight of

its responsibility to analyze independently and intelligently the settlement”); Federal Judicial Center, Manual

for Complex Litigation § 21.61 (4th ed. 2004); cf. Mirfasihi

v. Fleet Mortgage Corp., 551 F.3d 682, 686-87 (7th Cir.

2008); In re General Motors Corp. Pick-Up Truck Fuel

Tank Products Liability Litigation, 55 F.3d 768, 812-13

(3d Cir. 1995).

So how should we proceed? We could remand the case

to the district court for a determination of whether

to approve the dismissal of Liberty’s appeal. But that

would inject needless delay. A superior alternative

would be to conduct our own investigation of whether

to approve the settlement between Liberty and AIG. The

first step would be simply to require submission to us

of the settlement agreement. Maybe on reading it we’d
Nos. 12-1157, et al. 17

conclude that it is innocuous and dismiss the appeals.

But maybe not. According to Liberty its independent (nonclass) claim against AIG was valued at $25 million in

the district court settlement. If Liberty’s appellate settlement with AIG exceeds that amount, this may be a

clue that AIG is paying Liberty to drop objections to

the settlement that, were they accepted, would benefit

the class. In that event the class is being hurt by the

blind withdrawal of Liberty’s appeal unless no more

money can be squeezed out of AIG, which we don’t know.

We should not dismiss the appeal without at least informing ourselves of the terms of Liberty’s settlement

with AIG. In dismissing the appeals without doing so

we are acting in haste, and for no good reason. The

motion to dismiss the appeals was filed more than two

months ago. Rather than arguing over whether to

dismiss them we could within this period have completed the investigation that would reveal whether

we should grant the motion.

3-25-13