In most settlement negotiations, it is taken for granted that the parties’ self-interest will lead them to advocate aggressively for their positions and against their opponents. After all, every dollar that the plaintiff obtains is one more dollar that the defendant must give up.
But in settlement of class action litigation, the calculus is different. Unlike in normal litigation, where the plaintiff is likely to receive the lion’s share of the recovery, named plaintiffs in class litigation are just one of thousands (or in some cases, millions) of class members who stand to take a very small share of any recovery. Because of this, class action attorneys typically choose the class representatives with an eye toward directing the litigation themselves. The interest of these plaintiffs’ attorneys (maximizing attorneys’ fees) is directly at odds with the interest of the absent class members (maximizing the class’ recovery).
Likewise, the defendants have no concern for the absent class members. Their interest is to keep total settlement costs down; they have no personal interest in how those funds are allocated (i.e., to the named plaintiffs or to the plaintiffs’ lawyers, as opposed to the class itself). As the Seventh Circuit has written, a class action defendant “has no reason to care about the allocation of its cost of settlement between class counsel and class members; all it cares about as a rational maximizer of its net worth is the bottom line—how much the settlement is likely to cost it.”
Because none of the parties litigating a class action have any interest in protecting the interests of the absent class members, the Federal Rules establish an in-depth process for review of class action settlements. Not only do absent class members receive notice of the settlement and an opportunity to object, but the court must also make an affirmative finding that the settlement is “fair, reasonable and adequate.” Fed. R. Civ. P. 23(e)(2).
The Seventh Circuit takes this responsibility seriously, routinely rejecting class settlements whose benefits inure to the parties and their attorneys at the expense of the absent class members. Most recently, the court rejected a settlement that it described as “a selfish deal between class counsel and the defendant [that] disserves the class.” Pearson v. NBTY, Inc., Nos. 14-1198, -1227, -1245, & -1389 (7th Cir Nov. 19, 2014).
In this quintessential consumer class action, the plaintiffs alleged that the defendants had made false claims and violated consumer protection laws in the marketing and sale of glucosamine pills. When the parties settled, class counsel agreed to a $4.5 million payout.
Following the settlement, though an estimated 12 million individuals could have filed claims, just 30,000 (one quarter of one percent) did so. Their total settlement payments amounted to $865,000. So if the district court had approved the settlement as written, 84% of the total benefits would have been paid out to the attorney, rather than the class.
The district court knocked down the attorney’s fees to $1.9 million, but this still meant that the attorneys were taking 69% of the total recovery. On appeal, the Seventh Circuit found this to be far too much and reversed the district court’s modified approval of the settlement. In doing so, the court took no prisoners in attacking the motivations of class counsel and their action in selling out the class:
Class counsel shed crocodile tears over Rexall’s misrepresentations, describing them as “demonstrably false,” “consumer fraud,” “false representations,” and so on, and pointed out that most of the consumers of Rexall’s glucosamine pills are elderly, bought the product in containers the labels of which recite the misrepresentations—and number some 12 million. Yet only one-fourth of one percent of these fraud victims will receive even modest compensation, and for a limited period the labels will be changed, in trivial respects unlikely to influence or inform consumers. And for conferring these meager benefits class counsel should receive almost $2 million?
Defendants settling class action litigation must take note that the courts will vigorously review class action settlements. Provisions that benefit only the plaintiffs’ lawyers, especially if they are detrimental to the class, must be supported by good cause.