In the late 1990’s, one of the hot topics in class action law was whether settlement classes had to meet the same Rule 23 criteria as litigation classes. With some exceptions, the resounding response from the U.S. Supreme Court was “yes.” Key to settlement class certification was that the settlement was arrived at fairly, with all class members adequately represented by class counsel so as to ensure due process.
The issue of evaluating settlement classes came before the Supreme Court in two asbestos cases: Amchem Prods., Inc. v. Windsor, 521 U.S. 591 (1997) and Ortiz v. Fibreboard Corp., 527 U.S. 815 (1999). The Court warned that settlement classes cannot be certified when plaintiffs’ counsel appears to benefit one set of class members at the expense of another. In those cases, the rights of those presently-injured were favored over those who would have future injury. Amchem and Ortiz teach that when disparate interests are present in a class, a fair settlement requires subclasses with separate representation.
Recently, the Second Circuit revisted the issue of adequate representation in the settlement context in In re Payment Card Interchange Fee and Merchant Discount Litigation, 12-4671-cv(L) (2d Cir. June 30, 2016). The ten-year litigation stemmed from alleged antirust violations against Visa and MasterCard in connection with a certain fee governing merchants, which was allegedly artificially inflated and which the merchants had no choice but to accept. The district court certified two settlement classes: one under Rule 23(b)(3), in which class members could opt out, and a non-opt-out Rule 23(b)(2) class. While the opt-out class would receive up to $7.25 billion, the non-opt-out class would only get injunctive relief.
Following the holdings in Amchem and Ortiz, the Second Circuit held that class counsel traded away benefits due the (b)(2) class in order to benefit the (b)(3) class. The settlement violated not only Rule 23(a) (4) (which measures the adequacy of class counsel), but due process. As the court held: “The conflict is clear between merchants of the (b)(3) class, which are pursuing solely monetary relief, and merchants in the (b)(2) class, defined as those seeking only injunctive relief. The former would want to maximize cash compensation for past harm, and the latter would want to maximize restraints on network rules to prevent harm in the future.” Amchem forbids unitary representation under such circumstances. Exacerbating this tension in the class, was the fact that class counsel’s fees — nearly $544 million –were based on a percentage of the (b)(3) class’s recovery. “The resulting dynamic is the same as in Ortiz. As the Supreme Court recognized in that case: when ‘the potential for gigantic fees’ is within counsel’s grasp for representation of one group of plaintiffs, but only if counsel resolves another group of plaintiffs’ claims, a court cannot assume class counsel adequately represented the latter group’s interests.” The conflict in the class was all the worse given that the (b)(2) class members could not opt out of the class.
Given the inadeqauate representation of b(2) class members, the court held that the settlement and release were nullites and that class members were not bound by them: “[m]erchants in the (b)(2) class that accept American Express or operate in states that prohibit surcharging gain no appreciable benefit from the settlement, and merchants that begin business after July 20, 2021 gain no benefit at all. In exchange, class counsel forced these merchants to release virtually any claims they would ever have against the defendants.” This was proof, the court held, of the denial of their due process rights.
Thus, the Court vacated class certification, reversed the approval of the settlement and remanded to the district court for further proceedings consistent with the Second Circuit’s opinion.
Lesson learned: class actions are representative actions, and as such, they are only legitimate if due process is satisfied. This is true not only in the litigation context, but in the settlement context too.