Class Action Settlement Objectors: Minor Nuisance or Serious Threat to Final Approval?

Recently, following a months-long and undisputedly arms-length class action settlement, the online wholesale club DirectBuy Inc. reached a settlement with the named plaintiffs in a putative class action pending in the United States District Court for the District of Connecticut. ¹See Rita R. Robinson, Attorneys general oppose DirectBuy’s class-action lawsuit settlement, Seattle Post-Intelligencer (April 12, 2011, 4:49 PM), available at http://blog.seattlepi.com/boomerconsumer/2011/04/12/attorneys-general-oppose-directbuy%E2%80%99s-class-action-lawsuit-settlement/. The essential theory of the case was that the defendant “represented that paid DirectBuy memberships entitle customers to purchase goods from manufacturers and suppliers at actual cost when, in fact, Defendants receive kick-backs from the suppliers and manufacturers out of the purchase price paid by DirectBuy members—resulting in members paying more than the actual cost for such goods.” ²Id. Following preliminary approval of the settlement, which had been reached with the assistance of a federal magistrate judge, and the implementation of a notice program, attorneys general from 34 states, Puerto Rico, and the District of Columbia filed an amicus brief objecting to the proposed settlement. ³See Brief Amicus Curiae of the Attorneys General of Connecticut et al. in Opposition to the Proposed Settlement, Wilson v. Direct Buy Inc., No. 3:09-CV-00590 (JCH) (D. Conn, April 12, 2011), available at http://www.atg.wa.gov/pressrelease.aspx?id=27786. The brief raised a variety of objections to the settlement, but the primary beef was that the only benefit to claimants was membership extensions or discounts on future memberships, which they argued amounted to a “coupon” settlement. ⁴Id. at 5, 9-15.

By the time the district court ruled on the motion for final approval of the settlement, a total of 39 attorneys general had lodged objections to the settlement, as had a small but vocal group of individual class member objectors and a consumer rights nonprofit organization. ⁵See, e.g., Judge Rejects DirectBuy Class Action Settlement: proposed settlement provided little benefit to consumers, judge ruled, ConsumerAffairs.com, available at http://www.consumeraffairs.com/news04/2011/05/judge-rejects-directbuy-class-action-settlement.html. Judge Janet C. Hall sided with the objectors, finding that the settlement was not fair, either substantively or procedurally. ⁶Wilson v. DirectBuy Inc., Civ. A. No. 3:09-CV-590 (JCH), slip op. at 8-29 (D. Conn. May 16, 2011), available at http://courtweb.pamd.uscourts.gov/courtwebsearch/ctxc/09cv590rulingop.pdf. The ruling has been met with praise from tort reform advocates ⁷See, e.g., Lisa A. Rickard, Class Actions: A Distortion of Justice and Continued Threat to America’s Prosperity, Institute for Legal Reform (May 16, 2011 12:03 PM), available at http://www.instituteforlegalreform.com/today-in-legal-reform/37-ilr-spotlight/294-class-actions-a-distortion-of-justice-and-continued-threat-to-americas-prosperity.html. and consumer rights advocates alike. ⁸See, e.g., Win! Court Rejects DirectBuy Class Action Settlement That Offered Little or No Benefit to the Class, Public Citizen (May 16, 2011), available at http://www.citizen.org/pressroom/pressroomredirect.cfm?ID=3345. However, the court’s decision to deny the settlement, and the ever-increasing scrutiny on class action settlements from courts, government regulators, commentators, and the public, has many class action attorneys wondering what they can do to avoid the same result in their next settlement.

This article discusses three different types of class action objectors and the mechanisms by which they may make their objections. It then proposes strategies for preventing objections to class action settlements or defending against them if they occur.

There are at least three distinct types of possible organized objectors. We use the term “organized objectors” to distinguish these types of objections from objections that may be asserted by individual class members who are not represented by separate counsel. They are 1) professional objectors; 2) government officials; and 3) public interest groups. ⁹See Edward Brunet, Class Action Objectors: Extortionist Free Riders or Fairness Guarantors, 2003 U. Chi. Legal F. 403, 403 (2003).

Professional Objectors

What most practitioners would consider “professional” objectors does not include nonprofit associations and lawyers whose motivation is based on a genuine belief that the settlement is unfair to consumers or that class actions should be reformed. ¹⁰See id. at 438-439 (discussing attorneys who specialize in filing class action objections on behalf of absent class members, but in coordination with a public interest group); see also Richard A. Nagareda, Administering Adequacy in Class Representation, 82 Tex. L. Rev. 287, 375 (2003) (explaining that professional objectors “describe plaintiffs’ law firms that threaten objections largely as a means to obtain side payments for themselves in exchange for their agreement either to drop the objections or not to raise them in the first place.”). Nor would it include a lawyer who was retained by a client because of the client’s bona fide objection to the fairness of the settlement. ¹¹Brunet, supra note 9, at 439 (“[I]t is possible that a legitimately interested objector could emerge with important facts that shed new light on a putative settlement.”). While it is possible that the motivations of a particular objector’s counsel could be mixed or unclear, most practitioners would agree that the term “professional objector” is susceptible to the same “I know it when I see it” standard as Justice Potter Stewart’s standard for identifying obscenity. ¹²Jacobellis v. Ohio, 378 U.S. 184 (1964).

There is no doubt that there exists several cottage industries of entrepreneurial lawyers who have found creative ways to profit from class actions filed by other lawyers and their clients. ¹³Brunet, supra note 9, at 437 n.112. Professional objectors are but one of at least three groups of what many traditional plaintiff-oriented attorneys would no doubt consider interlopers (or worse) who seek to make a cheap buck off of someone else’s class action: 1) “copy cat” lawyers, who file competing lawsuits in other jurisdictions; 2) “opt out” lawyers, who round up individuals to opt out of class action settlements in order to file mass actions raising the same claims; and 3) “professional objectors,” attorneys who solicit members of a class in order to raise objections to a class settlement, in the hopes of extracting a portion of the fee or taking over as class counsel.

The influence of these groups, at least in the consumer class action context, has waned over the past decade. Five or 10 years ago, it was common to expect one or more objections to a large class action settlement filed by attorneys who had an obvious track record of objecting to class actions (and no obvious political or charitable agenda). Back then, many plaintiffs’ lawyers would simply agree to pay a small portion of the fee to the objector’s lawyer, rather than have the entire settlement held up for months or years while the objectors exhausted their appeals. ¹⁴See Bruce D. Greenberg, Keeping the Flies Out of the Ointment: Restricting Objectors to Class Action Settlements, 84 St. John’s L. Rev. 949, 950 (2010) (“Objector tactics can prove lucrative because the other parties may prefer to ‘buy off’ the objectors rather than suffer the delay and additional expense necessary to defeat the objection.”). These days, by contrast, there are a variety of techniques that have been successful in reducing the number of objections motivated purely by an outside lawyer’s attempt to profit from the settlement. The most significant tool has been to file a motion to require the objector or his attorney to post a significant bond, measured by a percentage of the value of the settlement, pending any appeal of the denial of an objection. ¹⁵See Brian T. Fitzpatrick, The End of Objector Blackmail?, 62 Vand. L. Rev 1623, 1625 (2009).

The problem of dealing with professional objectors is customarily the role of plaintiffs’ counsel, although after having agreed to a settlement, the defendant has just as much of an incentive to overcome objections as the plaintiffs’ lawyers do. ¹⁶See generally Brunet supra note 9, at 403 (discussing the dangers of collusion between class counsel and defendant); see also Nagareda supra note 10, at 375 (explaining that defendants “bent upon gaining finality for a class settlement might provide side payments to would-be challengers in order to secure their docility.”).

Government Officials or Agencies

Class action objections by government officials, especially state attorneys general, have become more common in recent years. This is at least partially the result of a sometimes overlooked section of the Class Action Fairness Act of 2005 (CAFA): the requirement that “appropriate” government officials be given notice of a proposed class action settlement in federal court. ¹⁷28 U.S.C. § 1715(b) (requiring defendants to give notice of a class settlement to appropriate federal and state officials not later than 10 days after the proposed settlement is filed in court). Even after the passage of CAFA it has been the rare case in which government officials have actually taken steps to comment on the settlement after receiving notice. ¹⁸This is likely because the same government deterrents that existed before CAFA still exist—namely the high resource costs for government entities in the face of tightening budgets. See Brunet supra note 9, at 411 (explaining pre-CAFA that government interventions into class action lawsuits face limitations including the high cost to governments). But, the additional notice required by CAFA means that government officials have greater access to information about class action settlements. Greater access to information, in turn, means that they have a greater likelihood of attempting to impact a class action settlement if they believe that it is necessary to do so.

Although CAFA requires notice to state officials, it does not give them any specific power to prevent the settlement. ¹⁹See generally 28 U.S.C. §§1332(d), 1453, and 1711–1715. In fact, state officials do not even have the express power to formally object to a settlement, which is why when they do act, it is usually in the form of an amicus (friend of the court) brief. ²⁰For example, see Brief Amicus Curiae of the Attorneys General of Connecticut in Opposition to the Proposed Settlement, Wilson v. Direct Buy Inc., No. 3:09-CV-00590 (JCH) (D. Conn, April 12, 2011), available at http://www.atg.wa.gov/pressrelease.aspx?id=27786. Ultimately, approval or disapproval of the settlement is still up to the trial court. However, an amicus brief filed by one or more officials in objection to a settlement is likely to strongly influence the court’s final approval decision. ²¹See, e.g., Figueroa v. Sharper Image Corp., 517 F. Supp. 2d 1292 (S.D. Fla. 2007).

At least two class action settlements have been disapproved in recent years following an organized objection from attorneys general. In addition to the DirectBuy case, in Figueroa v. Sharper Image Corp., the court denied final approval of a coupon settlement in no small part due to an amicus brief critical of the settlement filed by attorneys general of about 35 states and the District of Columbia. ²²Id. at 1301. In both of those cases, the attorneys general objected to both procedural and substantive aspects to the settlement.

Even outside the situation where it can be argued that the entire settlement is procedurally or substantively unfair, there are issues that may raise the interest of government officials sufficient to generate a partial objection. One example is when a release purports to foreclose actions on behalf of the public by government officials.

There has been a growing trend in recent years for attorneys general and other governmental agencies to use the doctrine of parens patriae to also pursue the monetary claims of private individuals. ²³See generally Edward Brunet, Improving Class Action Efficiency by Expanding Use of Parens Patriae Suits and Intervention, 74 Tul. L. R. 1919 (2000) (discussing the use of parens patriae lawsuits by state attorneys general to pursue the monetary claims of private individuals); see also Jack Ratliff, Parens Patriae: an Overview, 74 Tul. L. Rev. 1847 (2000). Under the parens patriae doctrine, a governmental entity pursues claims for monetary relief for the benefit of its citizens by essentially standing in their shoes and pursuing the citizens’ claims in a representative capacity. ²⁴See Ratliff supra note 23, at 1847-48. Because of the representative nature of parens patriae actions, a properly tailored release on behalf of class members in a civil case—at least theoretically—should foreclose the possibility of a governmental entity bringing an action for the same monetary relief. But adding this type of provision to a settlement agreement in a civil case can also draw the attention of the state attorney general or other consumer protection agency. As a result, a defendant seeking to include a release broad enough to cover parens patriae claims may well face a choice of having to litigate over an objection by a government official or agree to narrow the release and face the risk of a future parens patriae action.

Thankfully, most state officials have better things to do than file copycat lawsuits to try to squeeze more money out of a corporation that entered into a reasonable settlement of civil claims. ²⁵Nevertheless, as demonstrated by Wilson v. DirectBuy Inc., Civ. A. No. 3:09-CV-590 (JCH), slip op. at 8-29 (D. Conn. May 16, 2011), when attorneys general object, it creates serious problems for class counsel. Attorneys general consumer protection efforts are more commonly focused on exercising their law enforcement powers to prevent ongoing or future harm than on trying to ensure civil compensation for alleged victims of past civil wrongs. Moreover, as a practical matter, because government officials typically do leave civil damages enforcement up to private civil enforcement in the courts, post-settlement government action is not likely to become an issue except in those cases where a governmental agency had already been investigating or pursuing action relating to the subject matter of the civil dispute even before the settlement. ²⁶See, e.g., Conners supra note 25 (providing examples of cases in which class action counsel invited government participation during settlement negotiations to ensure resolution before finalizing the settlement). In those situations, it is a good idea to try to ensure some resolution with the government before finalizing the settlement in the civil case. ²⁷Id.

Public Interest Objectors

Mechanically, objections by public interest organizations may be accomplished in a manner similar to that used by professional objectors: through the representation of one or more settlement class members by lawyers employed by or cooperating with the organization. ²⁸Id. However, unlike with professional objectors lawyers, the representation is usually pro bono. ²⁹See, e.g., Center for Class Action Fairness LLC, available at http://centerforclassactionfairness.blogspot.com/. Alternatively, as with objections by government officials, public interest objections to a settlement may be accomplished through amicus briefs to the court. ³⁰See, e.g., Brief of Amicus Curiae Public Citizen Inc., in Support of Respondents, Wal-Mart Stores Inc. v. Dukes, No. 10-277, available at http://www.workplaceclassaction.com/Public%20Citizen.pdf. As with objections by government actors, objections to class action settlements by public interest groups are rare, but they can present a significant risk to approval when they do occur.

There are a variety of public interest organizations that file objections to proposed class action settlements. These organizations have widely differing purposes and political agendas. For example, the Center for Class Action Fairness (CCAF) was founded by attorney and leading tort and class action reform advocate, Ted Frank. ³¹Center for Class Action Fairness, LLC, available at http://centerforclassactionfairness.blogspot.com/. Mr. Frank is also a contributor to the popular law blogs, Overlawyered and Point of Law. CCAF is a nonprofit organization formed for the stated purpose of providing “pro bono representation to consumers and shareholders aggrieved by class action attorneys who negotiate settlements that benefit themselves at the expense of their putative clients.” ³²Press Release, Center for Class Action Fairness, “Center for Class Action Fairness Announces Multiple Victories” (Apr. 19, 2011) (summarizing various cases in which the organization successfully objected to class action settlements that “will result in class members receiving over $5 million more than what their class attorneys were willing to negotiate”), available at http://centerforclassactionfairness.blogspot.com/2011/04/april-18-press-release.html.

At the other end of the political spectrum from CCAF, at least from the perspective of tort reform, is Public Justice, an organization founded by leading trial lawyers that describes itself as “America’s public interest law firm.” ³³See Public Justice, Homepage, available at http://www.publicjustice.net/. A stated objective of Public Justice is to fight interests aimed at “closing the courthouse doors so victims can’t hold the powerful accountable,” including fighting “class action bans and abuses.” ³⁴See Public Justice, What We Do, available at http://www.publicjustice.net/What-We-Do.aspx. Like CCAF, Public Justice has successfully objected to or intervened in a variety of class action settlements. ³⁵See Leslie Brueckner & Arthur Bryant, Fighting Class Action Abuse, Public Justice, available at http://www.publicjustice.net/Key-Issues-Cases/Access-To-Justice/Class-Action-Preservation/class-action-preservation.aspx.

A third organization, Public Citizen, is a consumer advocacy group that has the stated goal of preserving consumers’ rights to seek relief through class actions. ³⁶See website for Public Citizen, available at http://www.citizen.org/Page.aspx?pid=183. However, according to its website, “[a]t the same time, we recognize that on occasion class action settlements may not be in the interest of all class members, and in such cases we have often represented class members in objecting to and seeking to improve the terms of such settlements.” ³⁷Id. available at http://www.citizen.org/Page.aspx?pid=369.

Although the political motivations of these organizations might be different, there are several key similarities among these groups. First, their interest in objecting to a settlement is based on a sincerely held belief that their involvement is necessary to protect the public interest. This means that they are not motivated by profit, but rather by a conviction that the settlement (or the system itself) is unfair. Like government objectors, their goal is to gain disapproval of or modification to the settlement, not to extort a portion of the fee.

Second, regardless of the ultimate motivating philosophy, even public interest groups with drastically different political agendas can find the same kinds of settlements or settlement terms objectionable. Not surprisingly, many of their objections are the same as those that a government official might make. Coupon settlements are a natural target. A conservative group formed to combat class action abuse might object to a coupon settlement because the fact that a coupon settlement was the best the plaintiffs could do for the putative class reflects that the case was a frivolous, lawyer-driven case that had no societal value in the first place. A consumer advocacy group might object to the same settlement because of a perception that it is unfair for a defendant to profit from its own wrongdoing. Where both groups might agree is that the court should not approve a settlement that includes little or no benefit to class members and a large payout to the plaintiffs’ lawyers.

One area in which right-leaning and left-leaning public interest groups may diverge is in their view of cy pres provisions in class action settlements, that is, distribution of any unclaimed funds to a charity. Class action reform advocates object to cy pres distributions because they don’t benefit the members of the class, and are sometimes simply a tool used by trial lawyers to raise funds for their own pet causes. ³⁸Sam Yospe, Note, Cy Pres Distributions in Class Action Settlements, 2009 Colum. Bus. L. Rev. 1014, 1023 (2009) (discussing the frequent lack of nexus between the residual fund beneficiaries and the plaintiff class). Trial lawyers in turn, argue that cy pres is the best way to deal with unclaimed funds, because the alternative would be to let the money revert back to the defendant, which would allow the defendant to profit from its wrongdoing. ³⁹Id. at 1042-44.

Strategies for Avoiding
Or Defending Against Objectors

The one common link between the three categories of objectors is that they are all looking for low-hanging fruit. None of the objectors in any of the three categories are likely to lodge objections to settlements that they think are likely to be approved anyway; and where reasonable minds can differ about the value of a case, objections that solely attack the substantive fairness of settlement terms are not likely to succeed. So, the best preventative medicine is to avoid settlement terms and notice programs that leave the settlement open to an easy attack on procedural fairness grounds.

Avoid the Appearance of Collusion.

This problem is usually avoided if the settlement is reached after an otherwise contested litigation, but can be a problem if the parties reach a settlement shortly after the complaint has been filed. In most cases, experienced plaintiffs’ counsel will insist on at least performing some confirmatory discovery before agreeing to a settlement in the first place, but if plaintiffs’ counsel does not insist, the defendant may consider making the suggestion voluntarily.

Where possible, negotiating the benefits to the class before discussing attorneys’ fees is also advisable. Negotiating fees separately removes a possible objection that plaintiffs’ counsel acted under a conflict of interest, and further avoids the appearance of collusion between the defendant and plaintiffs’ counsel or the named plaintiff. Plus, most experienced counsel on both sides already have a rough idea of the range of attorneys’ fees that a given set of settlement benefits will justify. So, leaving attorneys’ fees off the table does not usually prevent either party from understanding the full cost of the settlement being discussed.

Avoid Coupon Settlements.

As the DirectBuy case makes clear, if it talks like a coupon settlement, and it walks like a coupon settlement, it is a coupon settlement. As much as lawyers are trained to find win-win solutions, in the class action context, courts are skeptical of settlements where the benefits offered to class members also benefit the defendant or that require the relationship between the defendant and class members to continue as a condition for a class member to receive benefits. Agreeing to make even small monetary payments to class members is much less likely to attract objectors than agreeing to provide a coupon (even one of potentially greater value) for the defendant’s products or services.

Ensure Reasonable Notice.

Inadequate notice programs are probably the most surefire way to attract objectors, while robust notice programs are perhaps the best way to ward them off. Concerns about the substantive fairness of the settlement are magnified when the court believes that the parties have failed to give reasonable notice. By contrast, it is much easier to overcome concerns about the substantive fairness of the settlement when the parties can show that class members received reasonable notice and a fair opportunity to object, opt out, or participate.

The basic keys to a successful notice include ensuring that the settlement notice is in plain English, understandable, and contains all information required by Rule 23(c)(2)(B). The Federal Judicial Center guidelines for plain English notice, available at www.fjc.gov, provide an excellent template. However, the template must be tailored to each case in order to provide effective notice. Hiring a qualified notice expert (not simply a settlement administrator) to help draft the notice and testify about the fairness of the notice plan can protect against possible objections to the fairness of the notice.

Beyond the basic content of the notice, the notice must be delivered in a way that makes it truly the best notice practicable. Intentionally using a method of notice that is unlikely to be read and appreciated by class members, in the hopes of reducing the response rate, is folly. If you don’t do everything reasonably possible to give class members adequate notice of a settlement, you risk having the entire settlement disapproved after you have already incurred significant notice costs. In many cases, direct mail is still considered the best way of distributing notice. Technology has made direct mail possible even in cases where the last known addresses of class members are a few years old. Old addresses can be updated through the post office change of address system, as well as through various private databases. Again, having a qualified notice expert can help. If it is truly impossible to reach a sufficient number of class members through direct mail, then a published notice can be used as a supplement, but it is better to think of published notice as a last resort.

Be Honest With the Court.

Avoid settlement terms or arguments that exaggerate the true value of a benefit to be given to the class. A settlement does not have to give class members 100 percent of the claimed damages in order to be fair. It is, after all, the result of a compromise. However, exaggerating the value of benefits, especially non-monetary benefits, is one of the surest ways to draw objections and skepticism from the Court.

Don’t Overreach With the Release.

Courts will routinely approve release language that releases the claims raised in the case on behalf of all class members who do not opt out, whether or not they participate in receiving available settlement benefits. However, releases that purport to release claims unrelated to the litigation, or claims on behalf of individuals or entities other than the class members, open the settlement up to objection. In particular, as noted above, government objectors will take exception to attempts to foreclose future government action.

Avoid Unnecessary Publicity.

It may be tempting to use a publication notice program to either save on mailing costs, or with the idea that class members are less likely to make a claim. But as most class notice experts will tell you, to be effective in guaranteeing reach, a publication program is usually more expensive than direct mail, and these days, it is possible to find up-to-date mailing addresses even when the last-known addresses of class members are decades old. Moreover, unnecessary publicity raises the risk that government officials, professional objectors, and public interest groups will scrutinize it. So, in the end, it doesn’t pay to cut corners.

Have Principled Basis for Dealing With Unclaimed Funds.

Unclaimed funds or other settlement benefits are an unavoidable side effect of many class action settlements. When there are unclaimed funds, none of the conceivable ways of dealing with those funds are immune from potential objections. Cy pres awards may arguably have a societal benefit, but by definition, they don’t benefit the actual members of the class. Giving excess funds to those class members who participate is arguably nothing more than a windfall. Reversions are criticized because the money is given back to the “wrongdoer.” But since something has to be done with unclaimed funds, the key is not avoiding the possibility of an objection altogether but rather having principled reasons for the options that the parties select.

Reversions have been criticized by some courts, but there are compelling reasons supporting the conclusion that a reversion is the most fair and efficient way of dealing with unclaimed settlement funds. Although sometimes objectors, and even courts, have to be reminded of the fact, a settlement is a compromise resolution of a dispute, not a penalty for established wrongdoing by the defendant. And, the idea that money not paid out in a class action settlement simply goes to line the pockets of corporate fat cats, while making for good fiction, is not in line with the reality of how corporations work. Instead, money returned to a corporation ultimately benefits a wide variety of people, including employees, shareholders, and customers. So, there is nothing inherently wrong with returning unclaimed funds to a defendant. In addition, in many cases, the class does benefit from a reversion even more directly than it would from, for example, a cy pres payment to charity. In insurance cases, for example, policyholders benefit from lower settlement payouts in the form of lower premiums.

Paying out additional money to those class members who do participate can often be justified on the grounds that because the settlement is a compromise, they are not being made whole. So, unless the settlement contemplates a 100% payout of alleged damages in the first place, there are good reasons why the parties would agree to distribute a portion of any unclaimed funds to those class members who do make a claim.

If the settlement does include a cy pres component, finding an organization that is likely to benefit some or all of the class members directly is the best route to avoiding successful objections. Distribution to any organization in which one of the lawyers has a personal affiliation or stake will raise a red flag. Donations to a victim’s assistance fund, for example, are less likely to receive scrutiny than a donation to a lawyer’s law school.

In any settlement that may include unclaimed funds, above all else, the parties must do whatever they can to ensure that class members have a fair opportunity to participate in the settlement. Where reversion clauses, cy pres awards, or pro-rata distributions to claimants become objectionable is where they are combined with concerns about the adequacy of notice to the class. Courts that are convinced that the parties have done everything reasonably possible to give class members an opportunity to participate will have much less incentive to find anything wrong with whatever the parties agree to do with unclaimed funds. Parties often can’t force class members to claim benefits, but they do have the power to make sure that there are no artificial barriers to participation.