Like most cases, few class actions are filed with the intent of taking them to trial, and the vast majority that survive beyond the pleadings stage settle. But unlike most cases, class action settlements require court approval, which has become more challenging to obtain. Over the last several years, a growing number of courts have rejected class settlements—including high-profile, multimillion-dollar agreements—and recent decisions show that many courts continue to regard class settlements with a high degree of skepticism. Given the time, effort and expense involved in negotiating such settlements—as well as the significant stakes often involved—practitioners seeking to settle class actions should pay close attention to issues courts have identified in the course of rejecting classwide deals.

This article explores a selection of recent federal cases in which courts rejected class settlements, analyzes factors that prompted the decisions, and discusses means for avoiding similar outcomes.

Basics of Class Settlements

Rule 23(e) of the Federal Rules of Civil Procedure requires court approval for settlement or dismissal of “claims, issues or defenses of a certified class.” The rule's purpose is to protect unnamed class members who may be bound by the settlement. Accordingly, courts must assess whether the settlement is “fair, reasonable and adequate” for the class. Among the factors courts consider in evaluating class settlements are the risk of fraud or collusion; the complexity, expense and likely duration of the litigation, as well as the attendant risks; the stage of the proceedings and amount of discovery conducted; the likelihood of success on certification and on the merits; the opinions of class counsel and class representatives; and the reaction of absent class members.

Moreover, for class settlements negotiated prior to a court ruling on class certification, the certification requirements set forth in Rule 23(a) and (b)—also designed to protect absent class members—“demand undiluted, even heightened, attention in the settlement context.” Amchem Products v. Windsor, 521 U.S. 591, 620 (1997). Because settled cases will not go to trial, however, district courts considering such “settlement only” classes need not assess whether the case, if tried, would present the types of manageability problems that would preclude certification of a class for litigation purposes. Thus, in settlement situations, potential impediments to class certification are often characterized as trial manageability problems that are irrelevant to the approval analysis.

Theoretically, in class settlement scenarios, defendants seek finality but are not concerned with how settlement proceeds are allocated between counsel and the class; class counsel, meanwhile, seek to maximize their fees. This dynamic arguably creates incentives to craft deals that benefit class counsel at the expense of absent class members. Many courts analyzing class settlements are therefore particularly focused on the risk of collusion.

Certain types of settlements are more likely to raise concerns of collusion, such as early settlements and deals with no hard money component (e.g., injunctive relief, cy pres or “coupon” settlements). Indeed, recent cases rejecting class settlements reflect skepticism toward nonmonetary settlements and deals involving steep discounts off of alleged damages. In addition, one case indicates that Rule 23(b) has real teeth in the settlement context.

In re Hyundai and Kia Fuel Economy Litigation, No. 15-56014, (9th Cir. Jan. 23, 2018)

Despite the Supreme Court's recognition that Rule 23's certification requirements should receive heightened attention is settlement contexts (see Amchem, 521 U.S. at 620), many parties approach class settlements under the assumption that certification standards will be relaxed. Not so, said the U.S. Court of Appeals for the Ninth Circuit, in perhaps the most notable recent case rejecting a class settlement.

In In re Hyundai and Kia Fuel Economy Litigation, the plaintiffs filed suit in California on behalf of a nationwide class, seeking remedies under California state law for alleged misstatements to consumers regarding fuel economy standards. Follow-on lawsuits were filed in several other states, and the suits were consolidated in an MDL in the Central District of California. The parties then entered into a settlement estimated at $210 million, and the district court approved certification of a nationwide class for settlement purposes over multiple objections. The objectors appealed.

Applying its earlier decision in Mazza v. American Honda Motor, 666 F.3d 582 (9th Cir. 2012), a divided Ninth Circuit panel reversed, holding that the district judge improperly failed to consider whether California choice-of-law principles permitted application of the forum state's laws to plaintiffs from all 50 states. The court emphasized that, under a proper analysis, variations in state law could “swamp” common issues and defeat Rule 23(b)(3)'s requirement that common issues predominate.

The court further held that the district court improperly presumed classwide reliance on alleged misrepresentations for purposes of Rule 23(b)(3). The court reasoned that, absent evidence of a massive campaign that left “little doubt” that almost every class member was exposed to the allegedly misleading advertising, the relevant class must be defined to include only the exposed members. Here, the district court cited no evidence of such a campaign, and the class included used vehicle purchasers who likely were not exposed to the allegedly deceptive advertising.

Takeaway: The parties have sought en banc review and numerous groups have submitted amicus briefs critical of the decision. As such, Hyundai's long-term import is unclear. For now, however, parties in the Ninth Circuit seeking approval of national settlement classes involving state law, or deception-based claims, cannot take class certification for granted and should explore options such as focusing the settlement on federal claims or subclasses.

In re Subway Footlong Sandwich Marketing & Sales Practices Litigation, No. 16-1652 (7th Cir. Aug. 25, 2017)

In Subway, the U.S. Court of Appeals for the Seventh Circuit reversed the district court's approval of an injunctive relief class settlement. After an Australian teen's viral Facebook post showing that his Subway “Footlong” measured only 11 inches, several class actions were filed, and later combined, alleging Subway deceived consumers regarding the length of its sandwiches. Initial discovery revealed, however, that the vast majority of Subway's rolls were at least 12 inches and all rolls weighed the same before baking. Also, no consumer received less food even when the baking process caused a sandwich to be shorter. Having no compensable injury, plaintiffs shifted focus to an injunctive-relief-only theory, and the parties reached a settlement.

Under the settlement, Subway agreed to make additional efforts to ensure that its Footlong sandwiches were, in fact, 12 inches and to warn customers that variations in the baking process could result in a shorter sandwich. The settlement also provided for $520,000 in attorney fees to class counsel and $500 incentive awards to each of the ten class representatives. The district court approved the settlement and certified a class of Subway customers who purchased a Footlong or six-inch sandwich between Jan. 1, 2003, and Oct. 2, 2005.

Calling the settlement “worthless,” the Seventh Circuit reversed. The court found that “after the settlement—despite the new measuring tools, protocols, and inspections—there's still the same small chance that Subway will sell a class member a sandwich that is slightly shorter than advertised,” but even then, the sandwich would still “provide the customer with the same amount of food as any other.” The court added that a class settlement that provided fees to counsel with no meaningful benefit to plaintiffs was “no better than a racket.”

Takeaway: Subway may be an extreme example, but the lesson is clear. Parties to injunctive-relief class settlements—particularly those with significant fee awards—should be prepared to clearly articulate the actual benefit conferred by the business changes or other remedies proposed to avoid the appearance of collusion.

Matera vs. Google, No. 15-CV-04062-LHK (N.D. Cal. Mar. 15, 2017)

In Matera vs. Google, Judge Lucy Koh of the Northern District of California refused to approve a class settlement in an action alleging privacy violations in connection with Google's Gmail service. According to plaintiffs, Google allegedly intercepted, scanned and analyzed emails sent to and from non-Gmail users for purposes of creating user profiles and targeted advertising for Gmail users, in violation of the California Invasion of Privacy Act (CIPA) and the Electronic Communications Privacy Act (Wiretap Act). The parties proposed a settlement covering a class of non-Gmail users that provided for an injunction, a release, and $2.2 million in attorney fees.

In denying the plaintiffs' motion for preliminary approval, the court found that a proposed settlement notice to class members did not clearly disclose Google's practices or what technical changes the settlement required. The court also concluded that the proposed injunction still allowed Google to scan incoming emails for spam detection and later use that information for marketing purposes, and plaintiffs provided no authority to support that such practices were in compliance with the CIPA or the Wiretap Act. The court later approved a revised settlement, which stated that Google “will no longer scan the contents of emails sent to Gmail accounts for advertising purposes, whether during the transmission process or after the emails have been delivered to the Gmail user's inbox. ”

Takeaway: To demonstrate a clear benefit to the class, parties to injunctive relief class settlements involving technical changes should be careful to explain those changes in plain language and provide authority that the changes comply with applicable law.

Majdipour vs. Jaguar Land Rover North America, 12-cv-07849 (D.N.J. Mar. 28, 2018)

In Majdipour, plaintiffs sought preliminary approval of a national settlement class of owners and lessees of certain sport utility vehicles that allegedly were sold with defective suspensions. In exchange for a release and dismissal, the defendants agreed to reimburse class members for certain expenses, specifically, the lesser of the amount paid to replace a particular component or an amount based on the vehicle's mileage and length of ownership, within certain maximum duration and mileage caps.

The district court denied the motion for preliminary approval, despite multiple mediation sessions, confirmatory discovery, and an estimated settlement value of $6.2 million. The court found the settlement terms were not fair, reasonable, and adequate because the release included owners who fell outside of the maximum ownership and mileage caps and were therefore ineligible for any relief. The court also concluded that the relief for class members within the caps was “unusually low” compared to other settlements involving automobile defects, noting that certain members were eligible for only $100, despite allegations that replacement costs could be as much as $2,500. In addition, the court found that certifications from class counsel stating that proceeding with the litigation posed “'significant risks'” were insufficiently specific to justify relief so far out of proportion with actual repair costs.

Takeaway: Even if a class settlement provides for monetary relief, parties should be cautious of the breadth of the release and be prepared to sufficiently explain the bases for any discounts, particularly where such discounts are ostensibly inconsistent with comparable deals.

Conclusion

Whether a particular settlement is approved will depend on a variety of factors and the circumstances of the particular dispute. What is clear, however, is that approval is not a given, and the above cases illustrate some of the important factors practitioners should consider in connection with proposed class settlements in an environment of heightened scrutiny.

Terence N. Hawley is a partner in the San Francisco office of Reed Smith and focuses his practice on complex business disputes and class action defense.

Joshua D. Anderson is a litigation associate in the firm's San Francisco office and joined the firm following a clerkship for Judge Robert Pitman of the Western District of Texas.