In the last two posts, I discussed the roles of two of the players in class settlements: defense counsel and class counsel. For the third and final installment in this series, I will discuss the role of the third and most important player: the judge.
No class settlement can happen unless approved by a judge. Because most of the people affected by a class settlement are absent class members who are not before the court and have no real relationship with any of the attorneys, the judge has a special responsibility to protect their interests. That responsibility arises because of the potential for a conflict of interest between the named plaintiff and the named plaintiff’s counsel, on the one hand, and the class members who will be bound by the settlement, on the other. The process for settlement approval is designed to protect those absent class members from the risk of collusion between and among the named parties, in other words, the risk that their interests will be compromised to effectuate a sweetheart deal between defendant, plaintiff, and class counsel.
In fulfilling this responsibility, the judge is required to review and determine the adequacy of the notice to be directed to the class, the fairness of the settlement to the class members, and the attorneys’ fees and costs to be paid to class counsel as part of the settlement. That process usually occurs in two steps.
Step One: Directing Notice to the Class
In the first step, after the Settlement Agreement has been executed, the named plaintiff’s counsel files a motion for “preliminary approval” of the settlement or, more accurately, for an order directing notice to the class. Under Federal Rule of Civil Procedure 23(e)(1)(B), the judge isn’t required to preliminarily approve the settlement at all. Rather, the only thing being approved (or not approved) is the notice, based on a finding that the court likely will, at a later time, be able to approve the settlement and certify the settlement class. Nevertheless, many lawyers continue to refer to this process as “preliminary approval,” and some also ask the court to conditionally certify the class.
The level of scrutiny judges apply to this notice-directing stage varies considerably. In my experience, it has ranged from judges (or in some cases, clerks) who enter the preliminary approval orders without any hearing, to judges who hold perfunctory hearings, to judges who hold substantive hearings consisting of oral argument at which they pose their questions about the settlement to counsel. One highly respected and conscientious judge I appeared before went so far as to require counsel to answer multiple sets of written questions to his satisfaction before he would even agree to schedule a “preliminary approval” hearing (and he made it clear that the issue was the direction of notice, not preliminary approval of the settlement).
Rule 23, of course, anticipates that this step of the process will be more than window dressing. As the Advisory Committee Notes to the 2018 Amendments to Rule 23 explain, “[t]he decision to give notice of a proposed settlement to the class is an important event.” The parties are expected to provide the court with sufficient information from which it can make the required findings, and federal judges are expected to conduct a meaningful review of the proposed settlement before authorizing notice. This “front-loading” of the settlement approval process makes sense, given the often significant costs and delay attendant to the lengthy notice process.
Step Two: Approval of the Proposal
Despite the importance of the first step in the settlement approval process, the second step, generally referred to as “final approval,” remains paramount. Rule 23(e)(2) provides: “If the proposal would bind class members, the court may approve it only after a hearing, and only on finding that it is fair, reasonable, and adequate . . . .” The rule then sets out the matters the court must consider in making that determination. They include the adequacy of representation by the class representatives and class counsel, whether the proposal was negotiated at arm’s length, the adequacy of the proposed relief, and whether the proposal treats class members equitably relative to each other. The rule also describes the factors to be taken into account in determining whether the relief is adequate.
The role of the judge, then, is to examine the evidence and arguments submitted in order to make these determinations. If no class member has objected to the proposed settlement, the judge usually does this based on the papers and oral argument. If one or more class members object, the judge must resolve the objection. Judges have discretion to do so either on the papers, through oral argument, or after an evidentiary hearing.
The judge entertaining a motion for final approval of a class settlement must consider not only the fairness of the settlement, but also whether a settlement class should be certified. Here, the judge is required to apply the certification requirements of Rule 23(a) and (b), although the settlement context creates some limited flexibility. If the court had certified a litigation class under Rule 23(b)(3) before the settlement was reached, Rule 23(e)(4) provides that “the court may refuse to approve a settlement unless it affords a new opportunity to request exclusion to individual class members who had an earlier opportunity to request exclusion but did not do so.”
When the court certifies the settlement class, it also must appoint class counsel, if it hasn’t done so already. The factors governing class counsel appointment are set out in Rule 23(g). Additionally, the court must make a determination about awarding class counsel’s requested attorneys’ fees and costs, as well as the service award for the named plaintiff. The fee request is often the focus of class member objections. Even if no objection has been filed, judges are expected to review the request, and may award amounts different from the amounts requested.
This post describes the basics of the judge’s role in the class action settlement process. Every case, and every settlement, is different, and raises its own set of complex issues for the judge to sort through. Through this blog, we will continue to address the many nuances of class action settlements generally, as well as important issues arising in specific cases.