In 2010, the Seventh Circuit decided Pella Corp. Saltzman, 606 F.3d 391 (7th Cir. 2010) on a Rule 23(f) interlocutory appeal to address the question of whether fraud-based class actions automatically should be denied class treatment. Needless to say, the answer was “no.” As the Seventh Circuit readily admitted, fraud class actions don’t make great certification candidates, but each case deserves individual scrutiny. The Seventh Circuit again considered the Pella windows class action last week in Eubank v. Pella Corp., Nos. 13-2091, 2133, 2136, 2162, 2202, slip op. (7th Cir. June 2, 2014), this time to determine whether the settlement achieved in that case passed muster under Rule 23. The answer was an emphatic “no.”
The opinion, written by Judge Posner, doesn’t really say anything new. Instead, it says pretty much what we all knew but what judges don’t usually say: that class action lawyers drive class actions, not the named plaintiffs, and that class counsel can be motivated by their own self-interest to achieve a class settlement, not the interests of the class.
It has been clear since Justice Ginsberg’s 1997 decision in Amchem Prods, Inc. v. Windsor, 521 U.S. 591 (1997), if not before, that due process in class actions requires that class counsel not have interests antagonistic to the class. In Amchem, an asbestos class action, the Court would not allow an asbestos class to go forward because class counsel could not represent the interests of present and future claimants without selling one of those groups out.
In Pella, some 17 years after Amchem, it is clear that the issue of class counsel not representing the interests of the class continues to plague the system. The Pella case stems from windows with an alleged design defect, allowing for the windows to rot. The settlement was rejected for a number of reasons, not the least of which was that the monetary benefit to the class was illusory. The settlement was predicated on the submission of detailed claim forms by class members which, the court implies, were difficult to fill out given the passage of years and the amount of detail required. This led to very few class members’ taking advantage of the claims process, and resulted in large attorneys’ fees for little benefit to the class. In other words, the class reimbursement system seemed by design to discourage class members from getting compensated, while the lawyers that designed that system got rich, according to the court. The court goes to great lengths to explain the conflicts and issues underlying the settlement as well:
“The settlement should have been disapproved on multiple grounds. To begin with, it was improper for the lead class counsel to be the son-in-law of the lead class representative…Only a tiny number of class members would have known about the family relationship between the lead class representative and lead counsel — a relationship that created a grave conflict of interest; for the larger the fee award to class counsel, the better off Saltzman’s daughter and son-in-law would be financially….”
The court also discussed at some length the ethical issues facing class counsel: “[t]he disciplinary proceeding against Weiss was already under way when the settlement agreement was negotiated. It was very much in his personal interest, as opposed to the interest of the class members, to get the settlement signed and approved before the disciplinary proceeding culminated in a sanction that might abrogate his right to share in the attorneys’ fee award in this case. He could negotiate a quick settlement only by giving ground to Pella….”
What should settling parties in other cases make of this decision? Looking beyond the specific facts of this case, the decision is a reminder to defense counsel that achieving a settlement that does not ultimately benefit class members — even if class counsel agree to it — simply won’t do. It is important to look at the bigger picture and achieve a settlement that truly is fair. At the end of the day, a fair settlement benefits not only a company’s customers, but the company’s pockets and its reputation.