Conflicting Signals from the Third Circuit on Class Action Settlements

The Third Circuit recently issued two opinions that seem at odds with each other over the role of the trial court in reviewing class action settlements. In June 2010, the Third Circuit reversed a trial court for too actively scrutinizing a class-wide settlement. A month later, the Third Circuit did the opposite. In the first case, the Third Circuit seemed to elevate the sanctity of contract (a negotiated settlement agreement) above the trial court’s duty to scrutinize class settlements. In the latter case, it vacated the trial court’s approval of a negotiated class-wide settlement, finding that the trial court did not sufficiently scrutinize the negotiated, i.e., contractual, terms of settlement. Practitioners were left to wonder what role the trial should play in analyzing negotiated class-wide settlements. Perhaps sensing the confusion inadvertently sown, on August 27, 2010, the Third Circuit vacated its order in the second case and set the matter down for rehearing en banc.

Here is what happened. On June 15, 2010, the Third Circuit decided Ehrheart v. Verizon Wireless. In that case, the Third Circuit reviewed a trial court order vacating a negotiated class-wide settlement. The trial court had concluded that it could not certify the class or approve the settlement, because a new federal statute mooted plaintiffs’ claims. The Third Circuit (2-1 split) ruled that, although class members no longer had viable legal claims, that should not prevent a court from certifying the class and approving a previously negotiated settlement.

The Third Circuit showed a distinctly different approach in its ruling 30 days later in Sullivan, et al. v. De Beers. In that case, the Third Circuit reversed the trial court’s approval of a negotiated class action settlement. In De Beers, the Third Circuit found that the trial court had been overly deferential to the parties’ contract to settle and had not exercised sufficient scrutiny of the stipulated class and settlement terms.

Sending a message that might be seen as the opposite of the message in Verizon, The Third Circuit in De Beers said that where plaintiffs have no justifiable claim, there cannot be a class, and, therefore, there can’t be a class-wide settlement. Specifically, the De Beers court found that many states do not allow indirect purchasers to have antitrust claims and, therefore, many in the class did not have standing to assert the claims being settled.

There is a concerning tension between these two Third Circuit decisions – issued within 30 days of each other. In Verizon, the Third Circuit approved a negotiated class-wide settlement class involving claims that were no longer legally viable. It did so by exalting the primacy of contract and the public policy encouraging settlement. In De Beers, the Third Circuit did the opposite. It set aside a contract to settle, because, inter alia, some members of the purported class had no standing to assert the claims being settled. This leaves practitioners uncertain as to the effectiveness of negotiated class-wide settlements. Can defendants settle and stipulate to broad and questionable classes to gain sweeping protection from future claims? Does the judicial interest in settlement override other interests in assessing class action settlements? Is the trial court expected to examine vigorously the bona fides of stipulated classes and negotiated settlement? Should courts insist on compliance with all Rule 23 standards, even if it means overturning an agreed upon, class-wide settlement?

To its credit, the Third Circuit appears to have recognized that its opinions may have sent confusing messages. It has agreed to rehear, en banc, its decision in De Beers. Interestingly, however, that is the case which is more true to the tenets of Rule 23. Rule 23 – both textually and by judicial construction – has required courts to act in a quasi-fiduciary capacity to ascertain that class settlements are fair to all and not the result of improper collusion. The conventional tenets of Rule 23 suggest that Verizon, not De Beers, is the outlier decision. It will be interesting to see how the Third Circuit deals with this now open question in its De Beers en banc hearing. It is difficult to imagine that it will reverse the panel’s decision, which required strict scrutiny of settlements by the trial court. But time will soon tell.

Contributing author: Jillian Thornton, Esq.

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