Opinion ID: 688777
Heading Depth: 2
Heading Rank: 2

Heading: adequacy of the derivative recovery

Text: 18 Under Fed.R.Civ.P. 23(e), the district court determines whether a proposed settlement is fundamentally fair, adequate, and reasonable. Class Plaintiffs v. Seattle, 955 F.2d 1268, 1276 (9th Cir.) (quotation omitted), cert. denied, --- U.S. ----, 113 S.Ct. 408, 121 L.Ed.2d 333 (1992). Weinstein contends that the district court should have rejected the $12 million derivative settlement because it is unjust in light of the potential derivative recovery (allegedly over $1 billion) and compared to the securities settlement ($33 million). We will reverse a district court's approval of a settlement only upon a strong showing that the district court's decision was a clear abuse of discretion. Id. (quotation omitted). 19 We affirm. Judge Letts applied a proper legal standard and his findings of fact were not clearly erroneous. See Marchand v. Mercy Medical Ctr., 22 F.3d 933, 936 (9th Cir.1994). His conclusion that the settlement was fair, reasonable and adequate to Pacific Enterprises was based on evidence in the record. Even if the potential recovery might have been large, the odds of winning the derivative lawsuit were extremely small. California's statute of limitations for breach of fiduciary duty and the Special Litigation Committee's recommendation not to pursue the derivative lawsuit may have adversely terminated the litigation before trial. Even if it had gone to trial, derivative lawsuits are rarely successful. 4 Judge Letts found that the settlement eliminated significant risk. Based on the record, he concluded that continued litigation could have forced Pacific Enterprises into bankruptcy. Finally, Judge Letts relied on independent assessments by Debevoise & Plimpton, a law firm hired by Pacific Enterprises to evaluate the derivative settlement, and by one of the settlement mediators, retired district judge J. Lawrence Irving. Both Debevoise & Plimpton and Judge Irving concluded that the settlement of the derivative claims is in the best interests of Pacific Enterprises and its shareholders. The district court did not clearly abuse its discretion. 20 When reviewing complex class action settlements, we have a strong judicial policy that favors settlements. Class Plaintiffs, 955 F.2d at 1276. Parties represented by competent counsel are better positioned than courts to produce a settlement that fairly reflects each party's expected outcome in litigation. If, however, the settlement negotiations are biased, or skewed by a conflict of interest, we cannot presume that the attorneys have reached a fair settlement. Thus, a district court may not approve a proposed settlement if it is the product of fraud or overreaching by, or collusion among, the negotiating parties. Id. at 1290. 21 As part of their negotiating strategy, the defendants demanded that the two settlements be linked. This raises concerns about the fairness of the derivative settlement. Weinstein contends that individual defendants and the corporation may have used the derivative lawsuit to settle the securities claim. See In re Oracle Sec. Litig., 829 F.Supp. 1176, 1183-84 (N.D.Cal.1993). We recognize that linking the two settlements may give individual defendants an incentive to offer a generous settlement against the corporation in exchange for a small derivative lawsuit recovery. John C. Coffee, Jr., Understanding the Plaintiff's Attorney: The Implications of Economic Theory for Private Enforcement of Law Through Class and Derivative Actions, 86 Colum.L.Rev. 669, 718-719 (1986). Arguably the derivative shareholders receive nothing from the settlement because all of the proceeds from the insurance companies go to the securities plaintiffs. 22 Weinstein also argues that the linked settlement is biased because Milberg Weiss had a conflict of interest in representing both the derivative plaintiffs and the securities plaintiffs. We have carefully considered the argument. Although Spector & Roseman were co-lead counsel for the derivative plaintiffs, the record suggests that Milberg Weiss conducted most of the settlement negotiations for the derivative plaintiffs. Weinstein alleges that because of a conflict of interest, Milberg Weiss was willing to accept a lower derivative settlement so long as the class action produced a large recovery. 5 23 We are concerned about the potential conflicts created by the linked settlement and by Milberg Weiss's dual representation of derivative and securities plaintiffs, but Weinstein failed to raise these issues at any time prior to his appeal. See United States v. Flores-Payon, 942 F.2d 556, 558 (9th Cir.1991). A timely objection could have been properly evaluated before extensive settlement negotiations were concluded. 24