United States: Seventh Circuit Allows Review Of Potential Payments Made To Class Members Objecting To Class Settlement

Seyfarth Synopsis: In Pearson v. Target Corp., No. 17-2275, 2018 U.S. App. LEXIS 17337 (7th Cir. June 26, 2018), the U.S. Court of Appeals for the Seventh Circuit took aim at self-serving class settlement objectors and ordered the district court to review whether certain objectors received compensation in exchange for withdrawing objections. While not an employment case, the decision has significant implications for employers involved in class action litigation because it should discourage objectors from delaying class settlement approval by bringing meritless objections solely to receive payment in exchange for withdrawing objections.

Case Background

Nick Pearson brought a consumer protection class action suit in November 2011. Pearson, No. 17-2275, 2018 U.S. App. LEXIS 17337, at *3. The case settled, and the district court approved the settlement on January 22, 2014. Id. at *3-4.

Theodore Frank, a regular objector to class action settlements that contain "substantial attorneys' fees but meager benefits for the class," objected to the settlement on these grounds. Id. at *2. The Seventh Circuit agreed with Frank's objection and reversed the district court's decision. Id.

After the case was remanded, the district court approved a new class-wide settlement on August 25, 2016, and dismissed the action without prejudice. Id. at *4. Three objectors subsequently filed objections. Id. All three dismissed their objections before briefing on their objections began. Id. On November 18, 2016, pursuant to a stipulation agreed to by the parties, the district court entered a new order dismissing the class action with prejudice. Id.

Frank – who suspected that the three objectors who withdrew their objections received side settlements in exchange for withdrawing their objections – moved to intervene and disgorge any side settlements paid to the objectors. Id. at *4-5. The district court struck the motion on the grounds that it lacked jurisdiction because the action had been dismissed with prejudice. Id.

Frank then moved to vacate the order dismissing the action with prejudice under Rule 60(b) of the Federal Rules of Civil Procedure. Id. The district court denied the motion, and Frank appealed. Id. at *5.

Seventh Circuit's Decision

The Seventh Circuit began by considering whether Frank was "a party" who could file a Rule 60(b) motion. Id. at *6. It concluded that Frank was a party within the meaning of the rule because he objected to the initial settlement. Id.

The Seventh Circuit next considered whether Frank met his burden under Rule 60(b). Frank argued that the district court should have vacated the dismissal with prejudice and restated the dismissal without prejudice based on Rule 60(b)(1), which allows a judgment to be vacated based on "errors by judicial officers as well as parties," and Rule 60(b)(6), which allows a judgment to be vacated in "extraordinary circumstances." Id. at *6.

The Seventh Circuit found that Frank had not met his burden under Rule 60(b)(1) because the dismissal with prejudice was made subject to a stipulation, finding that agreeing to the stipulation was "a strategic decision" that "is enough to support the denial of a Rule 60(b)(1) motion." Id. at *6-7.

The Seventh Circuit also determined that the district court should have vacated the dismissal with prejudice under Rule 60(b)(6) for two reasons. First, the Seventh Circuit held that, if a "settlement disappoint[s] expectations," especially where there is nothing suggesting that an aspect of a class settlement is fair, courts should vacate under Rule 60(b)(6). Id. at *9-10. The Seventh Circuit found those factors present. Id.

Second, the Seventh Circuit opined that dismissal of a settled class action with prejudice is "inherently problematic" when settlement agreements, like the one at issue, provide that a court will have jurisdiction to determine all matters relating to the settlement agreement. Id. at *11. It found that, by dismissing the action with prejudice, the district court materially altered the settlement agreement, which would have required a new round of notice to absent class members. Id. at *11-12.

Accordingly, the Seventh Circuit reversed the district court's decision denying Frank's Rule 60(b) motion and ordered the district court to consider Frank's disgorgement motion. Id. at *13.

After rendering its decision, the Seventh Circuit noted its concern that "selfish settlements by objectors are a serious concern." Id. It noted that concern might be alleviated if Congress approves an amendment to Rule 23 that would require district court approval for "any 'payment or other consideration' provided for 'foregoing or withdrawing an objection' or 'foregoing, dismissing, or abandoning an appeal.'" Id. at *13-14.

Implications For Employers

Employers who settle class action lawsuits do so in large part to have certainty and finality. Objectors can stand in the way of that certainty in certain circumstances. While this decision will not end intervention by objectors to class action settlements, it is a shot across the bow of self-serving objectors who bring meritless objections solely in order to extract a payout. Accordingly, it should discourage such meritless objections that can stand in the way of certainty and finality.

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