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Courts Closely Scrutinizing Class Action Settlements

December 23, 2014 | Topic: Class Actions

Gone are the days of courts giving their “judicial rubber stamp” to class action settlements.  As stated by Judge Posner of the Seventh Circuit, although “[a] trial judge’s instinct, in our adversarial system of legal justice, is to approve a settlement, trusting the parties to have negotiated to a just result as an alternative to bearing the risks and costs of litigation . . . . a judge asked to approve the settlement of a class action is not to assume the passive role that is appropriate when there is genuine adverseness between the parties.”  Redman v. Radioshack Corp., 768 F.3d 622, 628 (7th Cir. Sept. 19, 2014).  Rather, a judge asked to approve a class action settlement should keep in mind the parties’ respective self-interests, which often results in a settlement that is unfavorable to the class, i.e., a modest settlement amount that is weighted in favor of attorneys’ fees for class counsel as opposed to an amount that results in a substantial recovery to the class.  Id.

Judge Dana M. Sabraw, District Judge in the Southern District of California, recently exemplified heightened judicial scrutiny of class action settlements in a February 2014 opinion.  In Newman v. Amercredit Financial Services, Inc., No. 11cv3041 DMS (BLM), 2014 U.S. Dist. Lexis 15728 (S.D. Cal. Feb. 3, 2014), a case brought under the Telephone Consumer Protection Act, 47 U.S.C. § 227 (“TCPA”), the plaintiff brought an amended motion to preliminarily approve a class for settlement purposes only.  In once again denying  the plaintiff’s renewed motion for preliminary approval, Judge Sabraw highlighted several distinct flaws with the proposed settlement, stating that these “highlights” were by no means meant to be exhaustive in the event the plaintiff elected to file another amended motion for class action certification. 

Below are a few crucial take-away points counsel should consider when drafting a class action settlement.

  • The settlement must clearly and concisely set forth the members of the proposed class.  Judge Sabraw faulted the Newman settlement because it failed to distinguish between individuals who had accounts with the defendant and those that did not, which potentially called into question whether some members had actually consented to the defendant’s call(s), thereby negating liability under the TCPA.
  • Enough discovery must be complete, such that the settlement explains how the claims administrator will accurately determine the validity of claims.  Judge Sabraw faulted the Newman settlement because it was not clear how the claims administrator would assess the validity of the claims, i.e., did eligible claimants include individuals whose mobile numbers had been actually called, potentially called, or both?
  • Do not limit the ability of putative class members to opt-out as a group, or require burdensome procedures to opt-out or file consent forms.  Judge Sabraw faulted the Newman settlement because it required class members to submit consent forms or opt-out notices by mail, rather than also providing for an electronic option (email, website, etc.). 
  • Do not limit access to the claims administrator, via toll-free number identified on the notice, to the 90-day claim period.
  • Do not concurrently file your motion for final approval of the settlement and your motion for attorneys’ fees and costs.  Citing to Ninth Circuit precedent, Judge Sabraw indicated that this procedure was faulty because it did not provide class members with an opportunity to object to the fee motion itself.  See In re Mercury Interactive Corp. Sec. Litig., 618 F.3d 988, 995 (9th Cir. 2009).
  • Do not draft the settlement agreement so that the agreement can be terminated if more than a specified number of claims are filed (courts feel this is contrary to the purpose of class action settlements), and do not state that the settlement can be terminated on the mutual agreement of the class representative and defense counsel. 
  • Ensure that you certify compliance with 28 U.S.C. § 1715 (notice to federal/state officials) where required. 
  • Ensure that the proposed notice is clear and unambiguous.  The notice should “discuss the pros and cons of each side’s case or disclose the damages and attorneys’ fees a prevailing plaintiff could recover if the case were fully litigated.”  Newman, 2014 U.S. Dist. Lexis 15728 *20.  The notice should also “adequately or accurately summarize the important terms of the Settlement, including what is required to make a valid claim, the meaning of pro rata distribution in the context of this settlement, or the release provisions.”  Id.


While the items listed above are by no means exhaustive, it provides a few guideposts for what federal judges are looking at when determining whether a proposed class action settlement is fair, reasonable, and adequate.