Judicial Review of Class Action Settlements

This article proposes a simple and coherent approach to judicial review of class action settlements. Specifically, we propose that for questions going to the adequacy of a settlement, where no warning signals of fraud or collusion are found, the court should act relatively deferentially by employing a lenient standard of scrutiny and approving a settlement if it has a rational basis. An intermediate level of scrutiny should apply when the settlement presents facial issues that implicate the fairness of the settlement. Such facial issues include the allocation of settlement proceeds among subgroups in a class, the presence of coupon-type relief, “shotgun” settlements occurring very early in the litigation, and settlements in overlapping class actions. In settlements with one or more of these characteristics, if the initial inquiry raises concerns, the court should demand a well-reasoned explanation for the choices made. Finally, where the components of a settlement present a direct conflict between the interests of class counsel and those of the class issues, such as issues related to attorneys’ fees, courts should employ exacting scrutiny and require convincing evidence that the proposal is reasonable. Judicial scrutiny over settlements is the most important safeguard against inadequate or conflicted representation by class counsel. Yet the standards for performing this responsibility appear confused. Courts promote and 1 Deputy Dean and Samuel Harris Professor of Corporate Law, Corporate Finance and Securities Law, Yale Law School. 2 Stuyvesant P. Comfort Professor, New York University Law School. We thank Richard Stewart for helpful comments. Both Macey and Miller have consulted in class action cases, and Miller has testified as an expert witness in a number of class action settlements, including several of the cases referenced herein. 3 Settlements of class actions require judicial approval before they can become effective. See Fed. R. Civ. P. 23(e). Similar requirements for judicial review of class action and derivative litigation settlements are contained in state class action rules. Winter 2009: Volume 1, Number 1 ~ Journal of Legal Analysis ~ 167 1 168 ~ Macey & Miller: Judicial Review of Class Action Settlements discourage early settlements, pronounce that the scrutiny required for settlement proposals is exacting and deferential, and esteem and denigrate the role of class counsel. Review of class action settlements takes the form of a list of factors uncertain in scope, ambiguous in meaning, and undefined in weight. Given that so many class cases settle, it would appear desirable to improve the clarity and efficacy of applicable rules. This article 4 Compare Ressler v. Jacobson, 822 F. Supp. 1551, 1554-1555 (M.D. Fla. 1992) (“early settlements are to be encouraged”) and In re M.D.C. Holdings Sec. Litig., 1990 WL 454747, at *7 (S.D. Calif. 1990) (“[e]arly settlements [of class actions] benefit everyone involved”) with In re General Motors Corp. Pick-Up Truck Fuel Tank Prod. Liab. Litig., 55 F.3d 768, 814 (3d Cir. 1995) (court should be wary before approving a settlement of a class action in its early stages) and Luevano v. Campbell, 93 F.R.D. 68, 86 (D.D.C. 1981) (“it is important to consider whether the settlement was reached after extensive factual development, so that counsel on both sides would have had information sufficient to make a reasonable assessment of their risks”). 5 See text accompanying notes 35-45, infra. 6 Compare Austin v. Pennsylvania Dep’t of Corrections, 876 F. Supp. 1437, 1472 (E.D. Pa. 1995) (recommendation of counsel is entitled to great weight) with Mirfasihi v. Fleet Mortgage Corp., 356 F.3d 781, 785 (7th Cir. 2004) (class actions are rife with potential conflicts between class counsel and class members). 7 See text accompanying notes 12-29, infra. 8 See Thomas E. Willging, Lauel L. Hooper & Robert J. Niemic (1996) (percentage of certified class actions resulting in settlement in the data set ranged from 62 percent to 100 percent). Settlement rather than trial is the norm in litigation generally. See Brian J. Ostrom, Neal B. Kauder & Robert C. LaFountain, eds. (2001); Leonidas Ralph Mecham (2001) (approximately 98 percent of federal civil cases resolved short of trial). 9 Commentators have addressed aspects of class action settlements. Some criticize the process as insufficiently protecting absent class members. See, e.g., Susan Koniak & George Cohen (1996) (highlighting risks of intra-class conflicts and collusive settlements); Debra Lynn Bassett (2004) (calling on courts to exercise more stringent review of adequacy of representation both at the certification and the settlement stages); Linda S. Mullenix (2004) (arguing that courts do an inadequate job of policing the adequacy of class representation when evaluating settlements); Howard M. Downs (1994) (criticizing judicial laxity in review of settlements). Proposals to upgrade the effectiveness of fairness hearings are found in Richard A. Nagareda (2003) (urging reviewing courts to require “a reasoned explanation by the settling counsel of the choices made in the class settlement design”); William B. Rubenstein (2006) (outlining mechanisms to improve the accuracy of review at fairness hearings). Proposals to authorize the judge to transfer lead counsel rights to successful objectors are found in Nagareda (2003) and Geoffrey P. Miller (2003a). Problems of conflict of interest among class members in settlements are addressed in Nancy Morawetz (1993) (calling for enhanced judicial scrutiny of allocation issues); Miller (2003b) (recommending use of a “veil of ignorance” perspective for intra-class conflict problems); David A. Dana (2006) (also employing a veil-of-ignorance perspective). A cost-benefit analysis of judicial review of settlements in several contexts, including class action litigation, is found in Sanford I. Weisburst (1999). Guidelines for the review Winter 2009: Volume 1, Number 1 ~ Journal of Legal Analysis ~ 169 proposes a simple and coherent approach to judicial review of class action settlements.