Opinion ID: 364689
Heading Depth: 1
Heading Rank: 5

Heading: Form of the Settlement

Text: 65 Even if we were not constrained to reverse the trial court's approval of the settlement because of the circumstances surrounding its negotiation, we would have to find the settlement defective in another respect. Although the defect may affect only a small portion of those to whom GM's offer would be extended, convenience and expediency cannot justify the disregard of the individual rights of even a fraction of the class. As an appellate court we are without power to rewrite the settlement of the parties. We only have the authority to approve or disapprove the settlement in the form it is presented to us. 46 66 The settlement order gives subclass members two options. If the subclass member signs a release he will receive the settlement package and his Magnuson-Moss claim will be dismissed. 47 But even if the subclass member refuses to accept GM's offer and refuses to sign the release, the order nevertheless dismisses With prejudice the subclass member's federal claim. 48 The subclass member is presented with an accept-or-else situation: if he does not accept, his federal claim is lost even though he cannot receive the benefits of the settlement package. We have searched the reported decisions in vain for precedent for such a settlement. Finding none and being of the opinion that the dismissal of the action is fundamentally unfair to nonconsenting subclass members, we cannot permit the settlement in its present form to stand. 67 GM argues that the form of the settlement is not unusual. It argues that nonconsenting class members are bound by a class settlement even if it is approved over their objections. Moreover, it argues, the very purpose of the 1966 amendments to Rule 23 was to eliminate the spurious class action in which potential class members could obtain the rewards of a favorable suit, but escape being bound by an unfavorable outcome. Thus, GM would have us hold that the dismissal of the Magnuson-Moss claims of nonconsenting subclass members is permissible. Finally, GM goes on to argue that (t)he settlement does allow class members, even at this late stage, to reject it and pursue state law remedies. To the extent nonconsenting class members are allowed to pursue any future litigation rights by the settlement . . . it is more favorable to them than federal law or policy require. We do not disagree with GM's arguments in the abstract. In the context of the particular settlement here which attempts to settle both state and federal claims, however, we must disagree. 68 We consider GM's last argument first. A fundamental characteristic of the federal courts is their limited jurisdiction. In the same pretrial order in which the trial court certified the class, it also expressly declined to take pendent jurisdiction over the state claims presented by the pleadings. Therefore GM's contention that the settlement was more favorable than federal law requires presumably because the trial court could have forced subclass members to accept the settlement package in return for all state and federal claims is without merit. The trial court, having declined jurisdiction over the state claims, was without power to extinguish them. The form of settlement with its unusual use of individual releases was apparently agreed to by GM and the Attorneys General in recognition of the federal court's inability to settle the state claims of subclass members. 49 The opt-out provision which permits nonconsenting subclass members to pursue state remedies is a necessary consequence of the limited jurisdiction of the federal courts. 69 We do not disagree with GM's statement that class members can be bound by a settlement over their objections and that the same is true of objecting named plaintiffs. 50 Similarly, we agree that Rule 23 was amended to eliminate the spurious class action. We do not think that it follows, however, that the trial court has the power under Rule 23 to dismiss with prejudice the Magnuson-Moss claims of those subclass members who refuse to accept the settlement package. As to them, the settlement is not a settlement; it is merely an offer to settle with a penalty, the dismissal of their federal claims, if they do not accept. We decline to put every subclass member to such an unfair choice. 70 This court on two occasions has noted that the essence of a settlement is a bilateral exchange. The inherent nature of a compromise is to give up certain rights or benefits in return for others. McDonald v. Chicago Milwaukee Corp., 565 F.2d 416, 429 (7th Cir. 1977). A settlement by its very nature is an agreement where both sides gain as well as lose something. Patterson v. Stovall, 528 F.2d 108, 115 (7th Cir. 1976). By the terms of the order of the trial court, subclass members who do not sign the release give up their Magnuson-Moss claims and the opportunity to be represented in the class action in return for nothing. 51 The right to pursue state remedies is not a benefit, because, as discussed above, the class members possessed state causes of action against GM independently of the federal litigation and the federal court is without power to extinguish those state-created remedies. GM gains the dismissal of each subclass member's federal claim, but surrenders nothing in return. 71 The federal claims of individual class members cannot be extinguished with neither adequate consideration in return nor a hearing on the merits of their claims. The dismissal of nonconsenting subclass members' claims would serve solely to benefit GM or those subclass members who accept the settlement. Reconciling such a settlement with notions of fair play and justice is impossible. To permit the trial court to exercise its power to approve class action settlements in this manner would contravene the Rules Enabling Act, 28 U.S.C. § 2072, by abridging the substantive rights of those who did not accept the settlement offer. 72 Our objection to the form of settlement in this case is similar to the Second Circuit's objection to fluid class recovery. See Eisen v. Carlisle & Jacquelin, 479 F.2d 1005 (2d Cir. 1973), Vacated and remanded on other grounds, 417 U.S. 156, 94 S.Ct. 2140, 40 L.Ed.2d 732 (1974); Van Gemert v. Boeing Co., 553 F.2d 812 (2d Cir. 1977). See also In re Hotel Charges, 500 F.2d 86 (9th Cir. 1974). In Eisen the Second Circuit's rejection of the use of fluid class recovery rested at least in part on the court's concern that that form of recovery would drastically increase the class action defendant's substantive liability. Cf. Beecher v. Able, 575 F.2d 1011, 1016 n. 3 (2d Cir. 1978) (defendant may agree to a settlement which provides for fluid class recovery). In this the converse situation, the form of settlement drastically reduces, in fact extinguishes, the subclass member's substantive cause of action under the Magnuson-Moss Act. 52 We hold the trial court's approval of the form of settlement here was unauthorized by the Federal Rules and was inconsistent with the trial court's responsibility to act as the protector of the interests of absentee class members. 73 We cannot hold that the dismissal of the federal claims of those who refuse to accept the settlement offer was insignificant because it merely closed one of the two avenues of recovery against GM. Relegating the nonconsenting subclass member to his state remedies severely reduces his chances of obtaining an adequate recovery on his claim. 74 The nonconsenting subclass member loses the advantages and economies of having his interest represented in the class action. This tends to defeat the purpose of the class action device to vindicate the interests of the victims of mass production wrongs. Generally, unless the anticipated recovery exceeds the sum of the measure of the injury and the cost of litigation, multiplied by the probability of a successful decision, the aggrieved person will not seek to vindicate his rights. Note, Judicial Prerequisites to Class Actions in Illinois: Policy, Practice, and the Need for Legislative Reform, 1976 U.Ill.L.F. 1159, 1167. The letters of those subclass members who objected to the settlement proposal indicate the illusory value of the right to pursue their claims individually: 75 I will go along with the majority. I can't afford to spend any money on a personal law suit. 76 Reguardless (Sic ) of the decision of the Court, I will accept it, because I cant (Sic ) whip a giant like General Motors, but you do have the powers of your Judgeship and your Court to set things stright (Sic ) as they should be. 77 This is not to be accepted as notice of withdrawal of Class or Subclass membership. 78 These letters also refute GM's argument that we can countenance the dismissal of the Magnuson-Moss claim of a nonconsenting subclass member because he was aware of the settlement's terms at the time he made his election to remain in or opt-out of the subclass. The opportunity to opt-out was not a very realistic one. Furthermore, we fail to see that a subclass member's knowledge that he may be treated unfairly excuses committing the injustice. 79 Even if the subclass member does pursue his state remedies, he is still prejudiced by the dismissal of his Magnuson-Moss claim. From a consumer protection point of view, the Warranty Act is clearly preferable to the Uniform Commercial Code, which is difficult to apply to consumer sales transactions and is full of pitfalls for consumers seeking recovery for defective products. Smith, The Magnuson-Moss Warranty Act: Turning the Tables on Caveat Emptor, 13 Cal.W.L.Rev. 391, 429 (1977). In addition to providing a more certain path to recovery, the Magnuson-Moss Act provides the consumer with a more adequate remedy. It provides that the successful plaintiff may also recover the costs of litigation (subject to the court's discretion not to award attorneys' fees). 15 U.S.C. § 2310(d)(2). Thus, the dismissal of the subclass member's Magnuson-Moss claim, leaving him to pursue his state remedies individually, reduces both the probability that the consumer will pursue those remedies and, if he does, the probability that his remedy will be adequate. 53 80 GM maintains that we should approve the settlement because it has the overwhelming support of the settlement subclass members. GM argues that because only fifteen subclass members or .03% Of the subclass opted out of the action or objected to the settlement after notification of its terms, 99.97% Of the subclass members support the settlement. Although the support of class members is one factor which should be considered in determining the fairness of a settlement, See Manual for Complex Litigation § 1.46 at 56, we are not as willing as GM to infer support from silence. 81 When a court evaluates the settlement of a class action brought on behalf of individual shareholders or consumers, it should be reluctant to rely heavily on the lack of opposition by alleged class members. Such parties typically do not have the time, money or knowledge to safeguard their interests by presenting evidence or advancing arguments objecting to the settlement. 82 Factors Considered in Determining the Fairness of a Settlement, 68 Nw.U.L.Rev. 1146, 1153 (1974). Accord, Developments in the Law Class Actions, 89 Harv.L.Rev. 1318, 1567-68 (1976); Cf. Simon, Class Actions Useful Tool or Engine of Destruction, 55 F.R.D. 375, 377-79 (1973) (discussing the tendency of class members not to respond to court communications. 54 Acquiescence to a bad deal is something quite different than affirmative support. 55 In any event, even if a majority of the subclass did favor the settlement, we do not believe that the preferences of the majority can justify the substantial injustice to the individual rights of the minority that the form of settlement proposed here would work.