Judicial approval of settlement proposals

Rule 23(e): judicial approval of class action settlements

Under the FRCP in the United States, parties must obtain court approval of a class action settlement before resolving the dispute via settlement. Court approval operates as a protection mechanism for absent class members. This requirement is rooted in FRCP Rule 23(e).

In broad terms, the settlement approval process involves three key stages:

A “fair, reasonable, and adequate settlement”

Courts are guided by a broad adage contained in the relevant procedural rule: that settlements must be “fair, reasonable, and adequate”. For many years, the statute offered no elaboration as to the meaning of this phrase. As a result, courts across the United States developed their own multi-factor tests to reach the same result. Though the statute was amended in 2008 to include elaboration, the general themes of the “fair, reasonable, and adequate” tests remain relatively unchanged and maintain focus on whether the interests of all class members have been adequately represented. Key components generally include (i) predicted cost of failing to settle (and thus, expending additional funds on continued litigation), (ii) overall reaction of the class to the preliminary award, and (iii) predicted outcome of hypothetical continued litigation.

Judicial settlement approval in the United States is focused on efficiency, judicial economy, and protection of the class members. US courts are generally careful to note that their role is not to design the settlement. Instead, the court’s task is to ensure reasonable fairness for the class members. In the narrow context of class action settlements, US courts are not responsible for enforcing policy, punishing the tortfeasor, or producing an exact calculation of settlement damages. Where applicable, regulatory bodies impose punitive fines and otherwise administer penalties. The settlement approval process is instead focused on payout to plaintiffs and fair apportionment of attorneys’ fees.

Applied principles

Two key principles have been developed by the courts in US class action settlements.

The first is that the court’s role in approving the settlement is limited to assessing whether it is fair, adequate and reasonable. In one relatively recent case, the court remarked that while it may have written a different settlement of its own, its role was merely to approve or reject a settlement under the relevant fairness parameters:

“In the end, this settlement was a bargain struck by the parties, negotiating amid the fog of litigation. If we were drawing up a settlement ourselves, we may want different terms or more compensation for a certain condition. But our role as judges is to review the settlement reached by the parties for its fairness, adequacy, and reasonableness.“

The second is that US courts can award substantial attorney fees out of the total settlement amount. In one case, a court awarded attorney fees of $181,250,000, being 25% of the settlement amount. US courts are additionally now also grappling with the effect of litigation funding. Currently, funders are allowed to finance litigation without ever disclosing their identity, and new proposed rules are examining mandatory disclosure to shine a light on secret funders of high-stakes litigation.

An alternative approach: multi-district litigation in the U.S.

There is a misconception that class actions are available for nearly any legal claim involving thousands of potential claimants. That is not the case. In the United States, there remain many claims that are not readily certified as class actions, primarily because there are unique individual issues, like bodily injury claims, that make the class action device ill-suited as a procedural mechanism. In these cases, plaintiffs pursue thousands or tens of thousands of individuals claims as “mass torts”. In order to better manage these cases, mass torts are often consolidated in Multi-District Litigation (“MDL”): a process by which multiple federal cases are consolidated by the Judicial Panel on Multi-District Litigation, and then tried as an aggregate.

Like the class action mechanism in the United States, MDL has the potential to more efficiently address claims in a consolidated proceeding before a single court. While MDL litigation has been the subject of intense academic criticism for fostering the filing of frivolous claims without a mechanism to evaluate and/or dismiss weak claims, MDL litigation does provide another mechanism to achieve settlement of thousands of mass tort claims. Unlike with class action mechanisms, court settlement approval is not required. However—or perhaps as a result—parties often file a motion to request court enforcement of the settlement to which the parties agreed.

In this regard the settlement of mass tort claims in the US is similar to schemes of redress in the UK.

Several high-profile cases in the US have resolved via settlement after having commenced the MDL process. For example: the Deepwater Horizon Settlement, and the Volkswagen “Clean Diesel” Settlement. In both instances, claimants were scattered across many jurisdictions, and individual proceedings would have overwhelmed the federal courts.

Bellwether trials

While not universally embraced across the United States, some courts have embraced the Bellwether trial to expedite multi-district proceedings. Akin to “test claims” in the UK, parties (with the assistance of the courts) will select a sample case–or a set of sample cases—to try before a court. The results of these trials then operate as a basis by which to settle or otherwise resolve the remaining controversies. While controversial, the Bellwether trial offers counsel a sort of “experimental lab” in which to test multiple theories of their case in front of several different juries. What’s more, the information gained from a Bellwether trial may inform parties as to the appropriate settlement amount (or whether the parties wish to settle at all). Test cases have the primary benefit of helping the parties “value” the claims for purposes of arriving at a fair settlement. Court approval of a settlement in a Bellwether trial is not required.