November 23, 1999
EXHIBIT C to Testimony of Brian Wolfman, January 22, 2002
Hon. Anthony J. Scirica
Chair, Standing Committee on Rules
of Practice and Procedure
United States Courthouse
601 Market Street
Philadelphia PA 19106
Hon. Paul V. Niemeyer
Chair, Advisory Committee on Civil Rules
United States Courthouse
101 West Lombard Street
Baltimore, MD 21201
Re: Proposed Amendment to Rule 23(e) Concerning Disclosure and Approval of Side-Settlements
Dear Judges Scirica and Niemeyer:
I am writing to you in your respective capacities as Chairs of the Standing Committee on Rules of Practice and Procedure and the Advisory Committee on Civil Rules to request consideration of an amendment to Fed. R. Civ. P. 23. Originally, I sent this proposal to Judge Edward Becker because of a prior discussion we had had on the topic. He in turn suggested that I send the material to you because of your Committee roles.
Attached to this letter is a suggested amendment to Rule 23(e), which would require that all "side-settlements," including their attorney's fee components, be disclosed and approved by the district court. The effect of such a change would be generally to prevent settling class counsel and settling defendants from "buying out" objectors on terms different from those offered to the class as a whole. The proposal would apply to all settlements whether they were struck while the case was before the district court or pending on appeal. The remainder of this letter sets forth examples of the problems addressed by the Rule change and the need for such a change.
In our experience, the practice of paying objectors to go away, without disclosure and approval, has become commonplace. Although we are aware of many such cases, consider the following four examples in large nationwide cases:
1. After announcement of the General Motor Pick-up class action coupon settlement in the federal MDL proceeding, counsel for GM contacted plaintiffs' counsel in a competing class action pending in state court. GM counsel was aware that this plaintiffs' counsel's clients would likely be objectors to the MDL settlement. GM counsel suggested that objecting plaintiffs' counsel might file an amended complaint that would allow removal of the state court class action to federal court, presumably so that it could be consolidated with the MDL proceedings. GM counsel further suggested that thereafter the settling parties might arrange payment of objecting counsel's fees -- but not one penny of additional relief for counsel's clients or for the class as a whole -- in exchange for dropping his clients' objections. Our understanding is that the plaintiffs' counsel did not accept the offer.
2. In the AcroMed bone screw "limited fund" settlement, In re Orthopedic Bone Screw Prod. Liab. Litig., 176 F.R.D. 158 (E.D. Pa. 1997), the district court's approval was very much in doubt. For one thing, the settling parties' assertions as to the value of the fund likely understated its true value by several fold. The settlement, moreover, released concededly solvent non-parties, against whom a large number of class members had significant claims. Finally, the settlement suffered from all the problems later condemned by the Supreme Court in Ortiz v. Fibreboard.
At least three groups of objectors -- one that had taken an appeal and two others that were contemplating an appeal -- were simply paid significant sums of money to drop their objections, i.e., they received a different and better deal than the other absent class members. The non-objecting class members' recoveries were limited by the class action settlement, which the district court approved on a express finding that there was a "limited fund" and that the defendant had nothing more to give. This "buy out" took place in complete secrecy, without disclosure to the court or the class members.
3. In another "limited fund" personal-injury settlement approved earlier this year, now pending on appeal in a federal circuit court, certain objectors now appear to be seeking a settlement that would involve cash payments without any disclosure or approval by the court, in exchange for dismissal of their appeals. The participants to the settlement recognize that this route is probably the only way to obtain a final judgment, and thus a lucrative private settlement, because the class settlement appears doomed by Ortiz.
4. Finally, in the John Hancock insurance fraud settlement, we represented a class member challenging what appeared to be a substantial cash payment to objectors and their counsel to drop their appeal on the merits, without any disclosure to the plaintiff class members, who received a decidedly different (and probably far less lucrative) deal. The First Circuit rejected our client's challenge, leaving no doubt that, in its view, secret side-settlements were permissible even if the settling class members were able to use an appeal as leverage to exact a better deal than the deal provided the rest of the class. Duhaime v. John Hancock Mut. Life Ins. Co., 183 F.3d 1 (1st Cir. 1999).
In each of these proposed or consummated side-deals, despite the Rule 23(e) requirements that class settlements be scrutinized openly and that the court approve all parts of them, the settling parties and objectors proceeded secretly. Indeed, in the John Hancock case, even after we got wind of the deal, the settling parties refused disclosure of these side-deals on the ground that only an overall class settlement, not settlement of the individual claims of members of the settlement class, are subject to Rule 23(e). And, since the First Circuit agreed with that analysis, we believe that the best approach now is to amend the Rule, although we may litigate the issue elsewhere if the circumstances warrant it.
In our view, the structure and purpose of Rule 23 demand that side-settlements be disclosed and approved by the district court. Whether one characterizes these side payments as "bribes" by the settling parties or "extortion" by objectors, or some combination of the two, something should be done to put an end to this conduct for at least four reasons.
First, permitting unregulated side-agreements subverts the Rule's structure regarding class membership. The Rule expressly permits only one method of exclusion from the class -- opting out in (b)(3) class actions. An opt-out must be exercised individually, and because it does not give a class member the ability to defeat the class action, it does not empower the class member to "hold up" an entire settlement. In short, it perverts the Rule to allow objectors, in effect, a "super opt out" that provides them enormous leverage to game the class action process for their own personal gain.
Second, allowing side-deals to go unchecked runs headlong into one of the chief purposes of the class action and of the Rule 23(e) approval requirement -- to assure that similarly-situated class members are treated alike. In this regard, a district court considering whether to approve a side-deal should ask this basic question: "Is there a good reason that this one group of class members should get a different [usually better] deal from all the other class members?" Because the courts already conduct something akin to this inquiry when they decide whether additional payments should be made to class representatives, this question is not foreign to the class action process. And the district courts in Georgine and Ortiz asked essentially the same question when they considered whether the side-deals for class counsel's individual clients were appropriate in light of the decidedly different class settlement. Generally speaking, we believe that it will be quite difficult for settling individual class members to justify disparate treatment, and thus the amendment we propose is likely to drastically curtail, if not eliminate, these side-deals.
Third, we are concerned not only about the existence of unfair side-deals, but in who obtains them -- lawyers and their clients who know how to game the system. The class action often serves as the means for ordinary citizens, without individual representation, to achieve justice. It is intolerable for the mass of pro se litigants (i.e., the absent class members, whether or not they object) to get one deal, while a small group of objectors with lawyers who understand the dynamics of the current system get another (presumably better) deal.
Finally, a Rule 23(e) disclosure-and-approval requirement will improve the Rule 23 objections process. This process is critical in helping to assure the fairness of class action settlements and in shaping the law on topics ranging from class certification, to opt-out rights, to the intended breadth of Rule 23(b)(1)(B), etc. We believe that more must be done by the courts and the rulemakers to facilitate the objectors' role under Rule 23(e). See Wolfman & Morrison, Representing the Unrepresented in Class Actions Seeking Monetary Relief, 70 N.Y.U. L. Rev. 439 (1996) (suggesting Rule changes to improve fairness hearing procedures and to accommodate needs of objectors). Our proposal to require approval of side-settlements will improve the overall Rule 23(e) process, which is intended to assure that the courts approve the good, and reject the bad, by weeding out objections with little merit, and encouraging serious objections that may give the court pause or lead to meaningful amendments to a proposed settlement. In this regard, we note that attorneys for objecting class members whose work benefits the class as a whole should be entitled to a court-approved fee. See generally Duhaime v. John Hancock Mut. Life Ins. Co., 2 F. Supp.2d 175 (D. Mass. 1998).
Our proposal also would formalize the current requirement that courts approve all attorney's fees and costs in class actions. Although courts almost always approve fees and costs, in recent years settling class counsel have argued that, when fees and costs are agreed to as part of a settlement, particularly when structured to appear to be separate from the relief accorded to the plaintiff class, they should be given little or no scrutiny. See, e.g., In re General Motors, 33 F.3d 768, 819-20 (3d Cir. 1995) (discussing and rejecting this approach); Zucker v. Occidental Petroleum Corp., 1999 U.S. App. Lexis 25824 (9th Cir. Oct. 19, 1999) (same).
Moreover, the proposed amendment would require disclosure and approval of all fee-sharing arrangements among counsel. The Second Circuit requires as much, see In re Agent Orange Prod. Liab. Litig., 818 F.2d 216, 225 (2d Cir. 1987), but the Sixth Circuit has rejected disclosure except in limited circumstances. Bowling v. Pfizer, Inc., 102 F.3d 777, 780-81 & n.3 (6th Cir. 1996); see also Adv. Comm. Notes to Fed. R. Civ. P. 54(d)(2) (court has discretion to demand disclosure, noting that one court's local rules requires disclosure). At an October 1998 class action conference of judges, academic, and practitioners sponsored by NYU law school, a prominent plaintiffs' class action lawyer candidly acknowledged that counsel fees are sometimes deliberately inflated so that he (as lead counsel) has sufficient funds to pay attorneys that are, in his view, undeserving hangers-on. We have watched this occur ourselves, and challenged the practice in Bowling, supra, because it operates to the potential detriment of class members. Without full scrutiny of fee sharing arrangements, it is more difficult to determine whether fees are bloated by payments to lawyers whose contribution does not warrant their allocated share. Thus, secrecy increases the likelihood that some of the money that the defendant was willing to give up goes to undeserving lawyers, rather than their clients. Disclosure and approval are the most direct and appropriate antidotes to this problem.
Moreover, we agree with Judge Weinstein that disclosure and approval of fee-sharing arrangements is important, almost for its own sake, to maintain the integrity of the class action device:
Because class attorneys have special fiduciary obligations to the class, and because the court has a responsibility to protect the rights of the class, the class and the court have a right to know about any agreements among counsel for allocating fees payable from a class recovery. In view of the lack of a personal relationship between most class members and the attorneys representing them it is essential that this information be available through the court. Class actions are public or quasi-public in nature. Rule 23 of the Federal Rules of Civil Procedure serves in many respects as a "sunshine" law in its requirements of notice to the class and public hearings. The public and press must have full access to information about this kind of fee-sharing arrangement so that an opportunity is afforded for comment and objection.
In re Agent Orange Prod. Liab. Litig., 611 F. Supp. 1452, 1462-63 (E.D.N.Y. 1985). Simply put, in ordinary bi-polar litigation, we would not tolerate a situation where the client does not know which of her lawyers are getting paid and how much. See Model Rules of Prof. Resp. 1.5(b) & (e). In class actions, there is even more reason to require a full accounting and, of course, court approval.
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Thank you for your time and consideration.
cc: Hon. Edward R. Becker
Mr. Peter G. McCabe
PROPOSED AMENDED RULE 23(e)
(new language italicized)
(e) Dismissal or Compromise.
(1) In general. A class action shall not be dismissed or compromised without the approval of the court, including all payments for attorney's fees and costs and the allocation thereof among counsel. Notice of the proposed dismissal or compromise shall be given to all members of the class in such manner as the court directs.
(2) Individual resolution. Any proposed dismissal or compromise of the claims of an individual named or unnamed member of the class who has not been excluded from the class under subdivision (c)(2), including any proposal concerning payment of attorney's fees or costs of such member, shall be filed with the court and served upon any class member who has entered an appearance. No such dismissal or compromise shall be consummated without approval by the court. Such dismissal or compromise shall be subject to approval of the court at any time during the pendency of the action, including when it is pending before the court of appeals or the Supreme Court of the United States.