United States: Ninth Circuit Order Vacating Class Certification in Vargas v. Lott

Key Issue

Whether a district court conducted a sufficiently comprehensive review in granting final approval of a settlement class given objections concerning (1) the actual relief the class would receive and (2) the presence of a "clear sailing" provision under which defendant Ford Motor Company would not object to class counsel's fee request.

Background

In Vargas v. Ford Motor Co., a proposed class of consumer plaintiffs brought misrepresentation and warranty claims against Ford for alleged defects in certain Ford transmission systems used in its Fiesta and Focus vehicles for certain model years.¹³ The defects allegedly caused delayed shifting, delayed acceleration, and premature internal wear on the transmission system.¹⁴

In 2017, Ford and putative class counsel reached a settlement agreement that afforded two forms of relief to the proposed class.¹⁵ First, Ford agreed to repair each class members' transmission systems at no cost and to make a $50 cash payment; however, if the transmission defects were not resolved after the second repair visit, class members would also receive escalating cash payments or discount certificates for the third and each subsequent repair visit.¹⁶ Second, class members could seek through arbitration Ford's repurchase of their vehicle if repurchase is an authorized remedy under the class member's state lemon law.¹⁷ Class counsel's expert estimated the settlement's value at $35 million.¹⁸ The settlement also contained a "clear sailing" provision, under which Ford agreed not to object to class counsel's requested fee award of $8,856,000.¹⁹

The district court held a fairness hearing and finally approved the settlement in October 2017.²⁰ Objectors argued that the settlement did not offer meaningful relief to class members. For example, the $35 million valuation was based on an estimated class of two million Ford owners eligible for repairs, but the actual claims rate and eligibility were expected to be much lower.²¹

Decision

In an unpublished decision, a split Ninth Circuit panel reversed the district court's final approval order and remanded for further consideration.²²

The majority held that the district court's analysis was procedurally inadequate because it failed to comprehensively explore relevant fairness considerations and non-frivolous objections. In particular, the majority found that the district court did not take a hard look at the disparity between the represented value of the settlement ($35 million) and its likely actual value, given that "the actual claims rate is likely to be very much less than 100%."²³ Moreover, the court expressed concern that the fee award was disproportionate to the likely recovery, especially given that the clear sailing provision guaranteed that Ford would not object to class counsel's requested fees.²⁴

Jude Rawlinson dissented, contending that the district court did not abuse its discretion and that the majority's opinion would have the court over-step its role and subject the district court to excessive scrutiny.²⁵ While the majority expressed its holding in terms of the district court's inadequate procedural review, Judge Rawlinson emphasized that the settlement "was reached through armslength negotiations supervised by a mediator, resulted in substantial relief to the parties, and was consummated following extensive investigation of the facts and applicable legal theories."²⁶

Thoughts & Takeaways

Vargas discusses important factors that courts should address when finally approving a precertification class settlement, and which parties should consider in formulating settlements to reduce scrutiny and to avoid potential reversal. For example, parties should be aware that, under Ninth Circuit precedent, "when confronted with a clear sailing provision, the district court has a heightened duty to peer into the provision and scrutinize closely the relationship between attorneys' fees and benefit to the class."²⁷ Vargas is also notable in holding that a district court should "ma[ke] an effort to estimate the likely claims rate" as part of its comprehensive review and explain its conclusions with a "sufficiently reasoned response."²⁸ That holding may be cited by objectors to other settlements, particularly because the estimated value of a claims-made settlement may often be supported by expert testimony that is not subject to the same degree of adversarial challenge that would occur in a litigated class certification proceeding.

Read about the opinion Here. As of November 2019, the district court is also conducting trials of certain cases brought by settlement opt-out plaintiffs. Read more about the trials here.

Footnotes

13 See Vargas v. Lott, —F. App'x—, Nos. 17-56745, 17-56746, 2019 WL 4391225, at *1 (9th Cir. Sept. 13, 2019).

14 Id.

15 Id.

16 Id. at *2.

17 Id. at *1. The settlement also provided that participants who successfully arbitrated their claims would be entitled to up to $6,000 in attorneys' fees.

18 Id.

19 Id.

20 See Vargas v. Ford Motor Co., No. CV12-08388 AB (FFMx), 2017 WL 4766677 (C.D. Cal. Oct. 18, 2017).

21 See Vargas, 2019 WL 4391225, at *1.

22 Id.

23 Id.

24 Id. at *2.

25 Id. at *4.

26 Id.

27 In re Bluetooth Headset Prods. Liab. Litig., 654 F.3d 935, 948 (9th Cir. 2011).

28 See Vargas, 2019 WL 4391225, at *1-2.

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