United States: Increased Scrutiny Means Increased Costs: Amended Rule 23 And Class Settlement Approval

In Short

The Situation: Recently amended Federal Rule of Civil Procedure 23(e)(2) requires courts to analyze several factors in evaluating whether to approve class settlements.

The Result: Class action settlements that would previously glide through the approval process are facing heightened court scrutiny, including at the preliminary approval phase, with increased costs and risks to defendants.

Looking Ahead: In structuring class settlements, defendants must weigh the benefits of favorable settlement terms against the risks and costs associated with increased judicial intervention. Parties must invest early in the litigation, including potentially frontloading discovery and involving a mediator, to lay the groundwork for justifying favorable settlement terms to increasingly skeptical courts.

Rule 23(e)(2)'s recent amendment reflects a wave of increased scrutiny of and focus on perceived inequity in class settlements. As has long been the case, "a class proposed to be certified for purposes of settlement—may be settled ... only with the court's approval." Fed. R. Civ. P. 23(e). While increased judicial scrutiny will not foreclose class settlement approval, federal courts' heightened attention to the required showing by parties to obtain preliminary and final approval will place an increased burden and cost on parties seeking approval. Parties must develop sufficient factual support and carefully craft well-grounded settlement terms to increase the likelihood of preliminary and final settlement approval, decrease the risk of appellate reversal, and avoid unanticipated costs and future headaches.

The Approval Factors

Rule 23(e)(2), as amended and effective December 1, 2018, reinforces that a court may approve a class settlement only when its terms are "fair, reasonable, and adequate." That determination must follow a hearing and the court's consideration of the following list of factors:

  • Whether class representatives and class counsel adequately represent the class;
  • Whether the settlement was fairly negotiated and at arm's length;
  • Whether the relief provided the class is adequate, considering the effectiveness of the proposed distribution of the relief to the class, the terms of proposed attorneys' fees, and any agreements of counsel; and
  • Whether the proposal treats class members equitably relative to each other.

The Advisory Committee acknowledges that courts have established and applied similar factors that reflect these considerations. The 2018 amendment does not displace any factor but instead focuses the court's analysis on due process and fairness concerns for the unnamed class members. The amended rule aims at streamlining a court's consideration of settlement proposals, particularly at the preliminary approval phase, unifying the federal courts' approach to approval, and increasing predictability for the parties. The changes also aim to reduce forum shopping and inconsistency in settlement approvals across jurisdictions, as all federal courts must now consider the same factors in approving class settlements. Most consequential for parties considering class settlements, the rule contemplates increased judicial involvement in and scrutiny of class settlements, including scrutiny of the manner in which relief is distributed to class members and whether the parties have made sufficient efforts to identify class members.

Heightened Judicial Scrutiny and Increased Litigant Costs

Although these changes are unlikely to result in outright rejection of many more proposed class settlements than under the former approach, the amended rule's practical effect is that parties cannot gloss over the equities of the settlement's terms until the final approval hearing. Rather, the rule forces the parties to consider the equities early in the litigation and during the settlement negotiation stage to ensure they can justify the proposed class settlement when they present it to the court for preliminary approval. Parties must make a robust showing to warrant the court's preliminary settlement approval. The Advisory Committee tells courts to consider the nature and amount of discovery conducted to determine whether class counsel had sufficient information as a basis for settlement. Courts may also consider the involvement of a mediator or settlement facilitator in determining whether the settlement terms resulted from real arm's-length negotiations rather than solely through direct negotiations by the parties' counsel (where collusion could potentially occur).

Under the amended rule, it is critical that, before seeking preliminary approval of class settlements, parties invest adequate resources and time early in the case to achieve a settlement that balances the core factors in Rule 23(e)(2). The higher required showing will likely result in more aggressive class discovery and increased costs—primarily for defendants who are often in possession of the lion's share of information and thus must gather and produce it in discovery, or who may ultimately bear the cost of formal mediation. The parties also will likely incur higher legal costs in navigating the settlement approval process, including higher costs in preparing preliminary and final approval papers.

Disincentivizing Objectors

The amended rule also provides benefits for parties to class settlement agreements. Specifically, while objectors' rights under Rule 23(e)(5) remain, Rule 23's amendments should give plaintiffs and defendants alike some ammunition and comfort on this front. Rule 23 discourages bad-faith objectors (also known as "professional objectors") by requiring these intervenors to "state with specificity" the grounds for any objection and to identify on whose behalf the objection is brought. The rule also provides that "no payment or other consideration may be provided" for withdrawing an objection without court approval. These requirements are intended to curb objections "advanced for improper purposes" such as "seeking only personal gain."

Four Key Takeaways

  1. Defendants must balance costs and benefits of settlement before launching into lengthy discussions and proposals to certify a class for settlement purposes.
  2. Defendants must think early on in the litigation about what discovery may be needed not only to oppose class certification but also to lay the groundwork for a potential settlement approval.
  3. Parties should consider formalized settlement or mediation settings to better demonstrate the settlement is the product of real arm's-length negotiations.
  4. While parties will likely face closer judicial scrutiny in obtaining class settlement approval, Rule 23's amendments disincentivizes bad-faith objectors and should give litigants some relief in dealing with meritless third-party objections.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions