UNITED STATES COURT OF APPEALS FOR THE NINTH CIRCUIT
STUART HANLON, et al., Plaintiffs-Appellees,
KENNETH & NANCY EDWARDS, et al., Objectors/Intervenors-Appellants,
CHRYSLER CORPORATION, Defendant-Appellee.
NOS. 96-15043, 96-16027
BRIEF FOR APPELLANTS
The Center for Auto Safety is a non-profit automobile safety and consumer advocacy membership organization with over 12,000 members nationwide. It has no parent companies, subsidiaries or affiliates.
This appeal challenges the approval of a nationwide consumer class action settlement involving defects in the rear liftgate latches of over four million 1984-1995 Chrysler minivans. The claims of the class arise out of a serious safety-related design defect which causes the rear liftgate latches to pop open and passengers to be ejected in moderate side-impact crashes.
The district court approved the settlement even though it provides nothing for class members beyond what they were entitled to receive wholly apart from the settlement. Prior to the settlement, Chrysler had agreed with the National Highway Traffic Safety Administration (NHTSA) to undertake a voluntary recall to replace all liftgate latches free of charge and to conduct an extensive owner notification and awareness campaign. Chrysler had publicly committed itself to take these steps through a massive public relations campaign and letters sent to millions of minivan owners. Because minivan owners do not receive independent benefit under the settlement and because the settlement actually harms class members by releasing their valuable rights under state law without consideration, it is not fundamentally fair, adequate or reasonable.
The district court had jurisdiction under 28 U.S.C. Secs. 1331 and 1367 and this Court has jurisdiction under 28 U.S.C. Sec. 1291. No. 96-15043, an appeal from a final order of December 1, 1995, was filed on December 22, 1995, and No. 96-16027, an appeal from a final order of May 7, 1996, was filed on May 17, 1996. The appeal was timely filed under Fed. Rule App. P. 4(a).
1. Did the district court err in (a) in failing to ascertain whether the putative class could properly be certified under Rule 23(a), and (b) in failing to consider the fairness of the settlement to class members from states with diverse consumer protection rights and remedies?
Class certification rulings are reviewed for abuse of discretion. See Six Mexican Workers v. Arizona Citrus Growers, 904 F.2d 1301, 1304 (9th Cir. 1990). In addition, whether the district court complied with Rule 23 is a legal question subject to de novo review. See Castano v. American Tobacco Co., 84 F.3d 734, 740 (5th Cir. 1996) (citing Gulf Oil Co. v. Bernard, 452 U.S. 89, 100 (1981)).
2. Did the district court err in approving a settlement of a nationwide consumer class action where the class would receive the purported benefits of the settlement whether or not the settlement was approved?
The standard of review on approval of class action settlements is for abuse of discretion. In re Pacific Enterprises Securities Litig., 47 F.3d 373, 377 (9th Cir. 1995). Under that standard, questions of fact are reviewed for clear error, and questions of law are reviewed de novo. See Cooter & Gell v. Hartmarx Corp., 496 U.S. 384, 405 (1990).
3. Did the district court err in awarding $5.2 million in attorneys' fees and costs?
A district court's award of attorneys' fees is reviewed for abuse of discretion. In re Washington Pub. Power Supply Sys. Litig., 19 F.3d 1291, 1296 (9th Cir. 1994).
On September 25, 1993, the National Highway Traffic Safety Administration (NHTSA) received a phone call from a police officer regarding a fatal accident in which a 1992 Dodge Caravan was struck in the left rear by a 1988 Mercury Grand Marquis travelling at 35 mph. The Dodge Caravan spun and the rear liftgate opened, ejecting two children (ages 5 and 7). One child died instantly; the other sustained critical injuries. NHTSA immediately opened a Preliminary Evaluation of the rear liftgate latches. See 49 U.S.C. Sec. 30166(b). On October 11, 1993, NHTSA received a second phone call from the same police officer, reporting an accident in which a child was killed after a collision in which a Chrysler minivan rear liftgate opened. By October 1995, NHTSA had confirmed 207 rear liftgate openings, 134 ejections, 98 injuries and 37 fatalities. E.R. 100.
In January 1994, NHTSA upgraded its investigation to an Engineering Analysis, to conduct a technical evaluation of the rear liftgate latch including testing the latch and the vehicle, and analyzing consumer complaints, accidents, fatalities, injuries and lawsuits. E.R. 102-71.
On November 17, 1994, NHTSA and Chrysler met to discuss the mounting evidence of the serious safety hazard posed by the latches. NHTSA hoped to persuade Chrysler to avoid formal enforcement proceedings by undertaking a voluntary recall. At that meeting, NHTSA showed Chrysler dramatic videos of crash tests, demonstrating the failure of the latches and passenger ejections in moderate side-impact crashes. E.R. 171-72.
Following the November 17, 1994 meeting, NHTSA and Chrysler negotiated resolution of the latch defect investigation. The agreement was made public on March 27, 1995 when Chrysler announced a "Service Action" to replace the rear liftgate latches on 1984-1994 vans. Chrysler then extended the Service Action on April 27, 1995 to 1995 models, necessitating redesign of the replacement latch. E.R. 173-81. The "Service Action" is basically a voluntary recall under which Chrysler agreed to replace the liftgate latches free of charge and to conduct an extensive owner notification and awareness campaign, in lieu of a formal NHTSA recall.
To memorialize their agreement, Chrysler and NHTSA exchanged letters in March and April 1995. Chrysler's Director of Vehicle Compliance and Safety Affairs summarized the key components of the "Service Action":
E.R. 66-69, 176-78. The NHTSA Administrator responded in writing that the Service Action would alleviate the agency's concerns about the performance of the latches in crashes. E.R. 71, 179.
Chrysler immediately took steps to implement the Service Action, sending letters to over four million minivan owners informing them of the Service Action, initiating massive advertising, and setting up a 1-800-MINI-VAN phone line to answer consumer inquiries. E.R. 56-57, 180-81, 184-229. NHTSA kept its investigation open "to monitor Chrysler's compliance with the agreement" and to ensure the adequacy of the replacement latch and the efficiency of the owner notification campaign. E.R. 182-83. (See Footnote 1)
Over the summer of 1995 Chrysler developed and tested a replacement latch and, as closure of the defect investigation phase of NHTSA's enforcement neared, on October 18, 1995, Chrysler's Assistant General Counsel wrote to NHTSA's General Counsel reaffirming once again Chrysler's obligations under the March 1995 Service Action. The Service Action includes the following steps:
On October 25, 1995, NHTSA closed the defect investigation. E.R. 91-102, 351-393. NHTSA Administrator Martinez praised the Service Action for including the key components of a formal safety recall, plus extensive advertising to promote a high completion rate. E.R. 351-93. Administrator Martinez emphasized, "We negotiated an agreement with Chrysler, instead of pressing on with our investigation that may have led to a forced safety recall, because Chrysler's latch replacement campaign include the key components of a formal safety recall." E.R. 91. The agency expected a high rate of latch replacement compared to other recalls, declaring that even a 64% response rate "would not be much to be happy about." E.R. 378. NHTSA reserved the right to initiate a formal recall or to publicize Chrysler's failure to replace an adequate number of latches, if necessary. E.R. 393.
Chrysler began notifying the first 66,000 minivan owners to visit their dealer for latch replacement during the first week of September 1995, although the replacement effort is expected to extend at least through 1996. E.R. 516-17.
In 1994 and 1995, after NHTSA had opened its defect investigation and while NHTSA and Chrysler were negotiating resolution of the defect investigation through the Service Action, individual van owners filed six putative class action lawsuits seeking only economic damages in Louisiana, Texas, Alabama, New York and California. The complaints in these cases, typically alleging state law claims of negligence, strict liability, and breach of warranty, sought to certify state-wide classes, limiting damages to $500.00 per class member for the latch defect. Limited discovery was taken in only three cases; no discovery was taken in the other three. In February and March 1995, motions for class certification were filed in four of the state court putative class actions.
In April 1995, the month after Chrysler announced the Service Action with great fanfare, class counsel in the state court cases met with Chrysler to discuss a nationwide settlement of the state court actions. Three settlement meetings resulted in the filing, on June 16, 1995, of the case presently pending before this court, Hanlon v. Chrysler Corporation, in United States District Court in California. The Hanlon complaint alleged violation of the Magnuson-Moss Warranty--Federal Trade Commission Improvement Act, 15 U.S.C. Sec. 2310(d)(1), negligence, strict liability, breach of express and implied warranties, fraud, misrepresentation, and violation of various state consumer protection statutes. The Hanlon action sought latch replacement, compensatory and punitive damages, and attorneys' fees. (See Footnote 2)
Three days after filing suit, on June 19, 1995, the parties entered into a "Settlement Agreement." On August 18, 1995, apparently without a hearing and upon the paper record alone, the district court preliminarily approved the settlement and tentatively certified the class, ordering that notice of the pendency of class action be mailed to class members and published one time in The Wall Street Journal. D.E. 18-19.
Under the Settlement Agreement, class members receive the identical, free replacement latch they are entitled to under "Chrysler's previously announced Service Action." E.R. 9 (Par. 8.1.1.). In addition, Chrysler commits to spend $14 million after May 26, 1995 on "Customer Awareness and Satisfaction Efforts" (exclusive of the cost of materials and labor) or achieve a 60% response rate to the Service Action within eighteen months (December 1996). E.R. 9 (Par. 8.1.2.). If Chrysler has not achieved a 60% response rate within eighteen months, Chrysler is to provide class counsel with a written summary of its expenditures. E.R. 10 (Par. 9). But, Chrysler's obligations are "conclusively fulfilled" if either Chrysler achieves a 60% Response Rate or spends $14 million. E.R. 10 (Par. 9).
The settlement does not state how Chrysler must spend the $14 million, and thus the specific activities are left to Chrysler's complete discretion. "Customer Awareness and Satisfaction Efforts" include all efforts undertaken to attain the Response Rate, even the cost of mailing letters to minivan owners. E.R. 9 (Par. 8.1.2). Chrysler may credit the costs of administering the settlement against the $14 million. E.R. 12 (Par. 18).
Moreover, the settlement sets no independent schedule for latch replacement. "The phasing for implementation of the Service Action, as well as the design of the replacement latches, will be under the control of Chrysler and will be with the approval of NHTSA." E.R. 9 (Par. 8.1.1).
As for the Service Action, Chrysler promises to continue it irrespective of the Settlement Agreement. E.R. 10 (Par. 10). Class counsel promise to intervene on Chrysler's behalf if any federal, state or local (except NHTSA) government initiates administrative proceedings in a parens patriae capacity. E.R. 14 (Par. 24). Additionally, if any governmental authority brings suit against Chrysler, Chrysler reserves the option, in its sole discretion, to immediately suspend relief to citizens of that jurisdiction. Id.
The release of claims is broad and extinguishes "any and all" claims for economic damages arising out of the rear liftgate latches for 1984-1995 Chrysler minivans "that were or could have been asserted," other than any claims for personal injury or death, and the release extends to authorized Chrysler dealers. E.R. 12 (Par. 17). The "Settlement Class" includes all registered Chrysler minivan owners as of July 21, 1995. E.R. 7, 8-9, 11 (Pars. 1.9, 7, 12).
Finally, the settlement commits Chrysler to pay reasonable attorneys' fees and expenses and to participate in a non-binding mediation process to arrive at a "mutually-agreeable recommendation" on fees. E.R. 11 (Par. 14). After mediation in front of a retired Superior Court judge, Chrysler and class counsel stipulated to an award of $5.2 million. No explanation was given of how the attorneys' fees are to be divided among counsel, nor whether the fees and costs are for work performed in the Hanlon action or in the state court cases.
Upon learning about the settlement, appellants in No. 96-15043, a group of minivan owners and the Center for Auto Safety, a national, automobile safety and consumer advocacy organization (known collectively as the Edwards Objectors) filed timely objections. (See Footnote 3) The Edwards Objectors' primary objection is that the settlement confers no benefit on the class since all class members receive is what Chrysler had already committed to do under the Service Action. Troubled by the lack of benefit for class members, the Edwards Objectors took limited discovery, focusing on several, crucial factual issues: (1) whether class members who opt-out of the settlement are entitled to receive the free replacement latch, (2) how Chrysler intended to spend the $14 million and whether Chrysler intended to deduct the amounts it would spend under the Service Action against the $14 million, (3) what was Chrysler's agreement with NHTSA pursuant to the Service Action, (4) when did Chrysler anticipate the replacement latches would be available, and (5) whether Chrysler had been truthful in explaining the latch defect to minivan owners and dealers.
In response, Chrysler stipulated that even class members who opted out of the settlement are entitled to receive the free replacement latch. E.R. 53. Regarding its plans for the $14 million, Chrysler acknowledged that it would count its expenses under the Service Action against the $14 million and that its activities under the Service Action were its only plans for expenditure at that time. E.R. 49-51, 56-57. In response to a question about its "agreement" with NHTSA, Chrysler referenced the letters exchanged with NHTSA in March 1995. E.R. 52, 62-72. Chrysler also produced copies of the 1-800-MINI-VAN script and a video announcing the Service Action sent to dealers. E.R. 184-228.
After receiving these discovery answers, the Edwards Objectors submitted their objections to the district court including numerous declarations from experts in the field of automobile safety, consumer behavior and vehicle recalls. (See Footnote 4) The Edwards Objectors also objected to certification of a nationwide class under Rule 23 without evaluation of the adequacy of class counsel's representation or the variations in applicable state consumer protection laws, to the attorneys' fee award, and to the notice given to class members. (See Footnote 5)
The district court held two fairness hearings in the Fall of 1995. At both hearings, class counsel submitted no evidence--documentary, testimonial or otherwise--to support a finding that the settlement was fair, adequate, and reasonable. Nor did they produce any evidence that would quantify any of the purported benefits of the settlement or the burdens imposed on the class through the release of state law claims. Thus, they produced no evidence to show that Chrysler would not have spent $14 million on the Service Action in the absence of the settlement; that Chrysler would attain a 60% latch replacement rate with the $14 million expenditure; or that the Service Action was catalyzed by the lawsuits.
Nor did class counsel counter the evidence submitted by objectors. For example, several objectors complained that the settlement provided no compensation for the diminished value their vans might suffer. E.R. 329-35, 342-47. Class counsel replied, "[t]here is no evidence that the latest controversy is disproportionately affecting Chrysler Minivan's trade-in value," D.E. 82, but did not contest the Edwards Objector's expert's declaration that the latch defect might well impair the resale value of the minivans in the future. E.R. 258-75. Similarly, the Edwards Objectors' experts stated, based on their familiarity with response rates to vehicle recalls, that it was extremely unlikely that Chrysler would achieve a 60% response rate even with a $14 million expenditure, particularly since Chrysler had downplayed publicly the safety hazards posed by the latches. E.R. 230-81. Yet neither class counsel nor Chrysler ever addressed this critical factual question nor did they explain the wisdom of ceding all discretion over the contents of communications with minivan owners to Chrysler. E.R. 10 (Par. 8.2).
Class counsel did not even take any steps to assure that the replacement latch was safe. Although at the first fairness hearing, counsel stated that their engineers would review the latch design, E.R. 83, they later shirked this responsibility. In fact, their own engineering expert criticized class counsel for not allowing him to evaluate Chrysler's replacement latch. E.R. 311-18.
Instead, class counsel relied entirely on the contention that the settlement was fair because it "contractually" obligated Chrysler to fix the latches. D.E. 45. Their theory was that a court-approved consent decree would allow individual class members to seek relief from the district court if Chrysler or a dealer failed to provide a latch in a timely fashion. E.R. 80, 84-86, 89. The notice to class members does not advise them of this "right," nor did class counsel propose giving class members any notice after the settlement that the district court would play this consumer protection function. Class counsel even argued that once NHTSA closed its investigation, the class action settlement would be "the only game in town" to monitor Chrysler's Service Action. D.E. 82.
Chrysler also argued that the value of the settlement was the contractual commitment to implement the Service Action. Although Chrysler has conceded in discovery that the company intended to complete the Service Action and even though Chrysler had promised millions of minivan owners in the Spring of 1995 that it would replace their latches, Chrysler argued in court that the letters it has exchanged with its federal regulator, which led to the formal closure of NHTSA's defect investigation, did not constitute an agreement with NHTSA to fix the latches. Thus, Chrysler argued that the settlement proffered valuable consideration because the company could have (not that it would have) fought NHTSA over the Service Action, including the latch redesign, and could have reneged on its promise to consumers.
As to attorneys' fees, class counsel averred that because the amount had been agreed to before a mediator that they were entitled to the $5.2 million agreed upon. They also argued that the state court putative class actions, rather than the federal regulatory agency, had "catalyzed" the Service Action, but refused to place any firm value on the settlement. E.R. 461-64. Class counsel failed entirely to submit any of the typical prerequisites for judicial approval of an attorneys' fee award in a class action settlement, such as time and expense records, or even a description of the work performed leading to the settlement.
On November 30, 1995, after hearing from the objectors, the district court approved the settlement from the bench. E.R. 474-85. The court found the settlement adequate because the class was getting a replacement latch "immediately or as immediately as this program can be kicked into gear and not years from now, as litigation would require," up to $14 million in outreach, and "some" commitment to a response rate. E.R. 475-76. The court credited counsel's arguments about the enforceability of the settlement:
The class is getting a contractual obligation, which is worth something. It's getting an enforceable judgment, which again, is worth something. It is getting some monitoring by the class plaintiffs, and, of course, it will have the continuing monitoring of NHTSA, and problems, if there are any, in connection with the compliance by Chrysler with the agreement would undoubtedly be referred to my jurisdiction if it couldn't be resolved otherwise.
E.R. 475-76. As for objectors' evidence that the class was not getting anything more than what Chrysler had already agreed to do, the court adopted Chrysler's argument that it could have fought with NHTSA over the Service Action, and that it had conceded that right by consenting to the Settlement. E.R. 477.
The district court concluded by citing considerations of judicial economy, and the fact that a "multitude" of state court suits and "balkanized decisions" would result if the settlement was not approved. E.R. 480-81. The district court acknowledged that judicial economy was not technically a factor to be weighed under Rule 23 but felt that the point was worth making "where the interests of administration of justice and the judicial system point in the same direction as what I believe to be adequate benefits to the class members." "Hopefully," the court concluded, "the problem is behind us . . . whether it's by this litigation or whether it's by NHTSA or whether it's by Chrysler's own goodwill, a remedy is being provided, the latches will be fixed, the p.i. and death cases will remain." E.R. 480-82. As for the attorneys' fees, the court approved the full $5.2 million, finding no "reason to substitute my personal values or personal opinions" for those of the retired Superior Court judge mediator. E.R. 485. On December 1, 1995, the district court entered orders approving the settlement, certifying a settlement class under Rule 23(b)(3), and awarding the attorneys' fees and costs of $5.2 million. E.R. 495-507. The Edwards Objectors appealed the December 1 order (No. 96-15043), as did two other groups of objectors (Nos. 96-15044, 96-15056). E.R. 508.
Nearly two months later, in late January 1996, Chrysler announced that it had failed to send notices to over 900,000 minivan owners residing in California and Puerto Rico and all business, governmental, and other entity owners ("Omitted Owner Group"). Following a limited remand from this Court, the district court reopened the case, directing that notice be sent to the Omitted Owner Group. D.E. 183.
The McPherson Objectors, members of the Omitted Owner Group and appellants in No. 96-16027, objected to the settlement. (See Footnote 6) They joined the Edwards Objectors's objections and presented two new developments at an April 29, 1996 Fairness Hearing. First, they submitted Chrysler's Quarterly Reports to NHTSA to demonstrate that, as of April 1996, Chrysler had contacted only 60% of owners to inform them of latch availability and replaced latches on only 13% of the 4.3 million minivans. (See Footnote 7) E.R. 544-50. This supported the objectors' contention that even with a $14 million expenditure Chrysler was unlikely to achieve a 60% response rate.
Second, objectors noted that after Chrysler's counsel had argued to the district court that the company had no "agreement" with NHTSA, Chrysler's Assistant General Counsel was quoted as saying that the company's agreement with NHTSA was, in fact, an "irrevocable commitment." E.R. 515. The McPherson Objectors urged the court to find that Chrysler intended to complete the Service Action independently of the settlement. At the very least, they argued that the conflicting statements raised a dispute of material fact sufficient to require proof by Chrysler of its true intentions.
At the April 29 Fairness Hearing, when confronted with the evidence of its seemingly conflicting statements, Chrysler made a crucial admission. Chrysler's counsel stated that the court could accept Chrysler's Assistant General Counsel's reported statement as accurate, adding "[t]here's no doubt that Chrysler, as a matter of good will, is probably going to do what it tells NHTSA it will do, and I wouldn't say otherwise in any public forum or credibly deny that." E.R. 579. In light of that concession, McPherson Objectors asked the court to reject the settlement as providing no value over and above Chrysler's Service Action and its agreement with NHTSA. E.R. 582-83.
The district court rejected both arguments. As to the low response rate, the court said that regardless of whether the response rate to the Service Action was 13% (McPherson Objectors), 21% (the court) or 28% (Chrysler), "there has been substantial progress" and "so I can't say that the progress which has been made is so insignificant that I've got to determine that the agreement is not fair, reasonable nor adequate." E.R. 584-85. As to the point about the lack of value, the court concluded that the settlement provides value by imposing a "contractual commitment" on the parties. E.R. 585. The district court entered orders on May 7, 1996, amending its earlier orders to include the Omitted Owner Group and the McPherson objectors appealed. E.R. 592-608.
The district court abused its discretion by approving a settlement that confers no benefit on class members beyond what they were already going to receive under Chrysler's previously-announced Service Action. In class actions, the courts have a particular obligation to ensure that the interests of absent class members are adequately protected. In this case, the class action settlement "piggy-backed" on a federal investigation into defects in Chrysler minivan rear liftgate latches. Under the pressure of public scrutiny, negative publicity and in an effort to forestall formal action by NHTSA, Chrysler undertook to redesign and to replace all liftgate latches on 1984-1995 minivans free of charge in the Spring of 1995 and to conduct an extensive owner notification campaign.
At that point, counsel in the state court putative class actions had only three legitimate options: withdraw their complaints, litigate, or settle their cases for sufficient and independent value. The option they chose--to initiate and settle a nationwide "settlement class action" for nothing more that what Chrysler had already committed to provide plus an award of $5 million in attorneys' fees--sacrificed the interests of the class members on the alter of class counsel's fees. Worse, the settlement permitted Chrysler to purchase a broad release of its liability on a nationwide basis for the cost of class counsel's fees. Approval of this settlement was an abuse of discretion.
This decision below can be set aside without reaching the question of the settlement's fairness, however. In certifying a nationwide settlement class, the district court failed to determine whether the class could in fact be certified under Federal Rule of Civil Procedure 23. The district court did not consider the adequacy of representation by class counsel and ignored the significant variations in state laws governing the claims of class members under Rule 23(b)(3). This failure was not merely a technical omission. Rule 23's drafters designed these procedural requirements to ensure that actions are prosecuted in a manner that is fair to absentee class members, who will be bound by the result. By not evaluating both the adequacy of class representation and the rights of class members under the various laws of their respective states, the district court did not carry out its fiduciary duty to ensure that the nationwide settlement not sacrifice class members with substantially greater rights to recovery under the laws of their states for class members with substantially fewer rights.
Finally, the award of $5.2 million in attorneys' fees and costs should be reversed because the district court improperly abdicated its independent responsibility to review the fee request and class counsel provided no evidentiary basis for determining a reasonable fee.
Objectors' primary contention is that this Court should reverse because the settlement did not provide the class with any independent benefit. Nonetheless, this Court could decide this case without reaching the question of the adequacy of the settlement because the district court committed serious legal error by failing to determine whether the class could be certified under Rule 23.
Despite Objectors' request that the district court conduct a proper Rule 23 analysis before certifying a nationwide settlement class and determine particularly whether Rule 23(a)(4) (adequacy of representation) and Rule 23(b)(3) (predominance and superiority) requirements, had been met, the district court failed to make formal Rule 23 certification findings. This deficiency was not merely technical. Because of the increased likelihood that absent class members will be shortchanged without an adversarial battle on class certification, "settlement class actions," i.e., class actions, such as this one, that settle prior to class certification, have been highly controversial. See In re General Motors Corp. Pick-Up Truck Fuel Tank Prods. Liab. Litig., 55 F.3d 768, 787-90 (3d Cir.)(in depth discussion of "perceived problems of settlement classes"), cert. denied, 116 S. Ct. 88 (1995). (See Footnote 8) As Judge Becker of the Third Circuit observed in the landmark General Motors decision, settlement class actions present "lucrative opportunities" for putative class attorneys to generate fees for themselves without effective monitoring by class members and may lead to early settlements that provide inadequate consideration. Id. at 788.
Although settlement classes have gained judicial acceptance over the years, courts have developed two safeguards to protect against abusive settlements. Id. at 793-94. First, courts are required to scrutinize the fairness of the settlement with greater care where the settlement was reached prior to class certification. See, e.g., Mars Steel Corp. v. Continental Illinois Nat'l Bank & Trust Co., 834 F.2d 677, 681 (7th Cir. 1987); Weinberger v. Kendrick, 698 F.2d 61, 73 (2d Cir. 1982), cert. denied, 464 U.S. 818 (1983).
Second, after a settlement is proffered, courts have insisted that Rule 23's class certification requirements be met. Indeed, General Motors holds that, in approving a settlement reached prior to class certification, the trial court must find that the Rule 23 prerequisites could have been met under the same standards applicable to litigation classes. 55 F.3d at 799-800. (See Footnote 9) Other courts, while suggesting that there might be a somewhat different standard for certifying a class in the settlement context, nevertheless require that the class action criteria be met and the class formally certified. See, e.g., In re A.H. Robins Co., 880 F.2d 709, 727-28 (4th Cir.), cert. denied, 493 U.S. 959 (1989); In re Dennis Greenman Securities Litig., 829 F.2d 1539, 1544 & n.5 (11th Cir. 1987); see also General Motors, 55 F.3d at 795 ("the courts and commentators that have endorsed settlement classes have seemed to assume that the approving court made the requisite class determinations at some point," citing cases and other authority). But see In re Asbestos Litigation, -- F.3d --, 1996 U.S. App. LEXIS 18475 (5th Cir. July 25, 1996) (courts can look to existence of settlement in evaluating Rule 23 criteria).
The Ninth Circuit has never explicitly held that formal class certification findings must be made in settlement class actions. However, this Court has cautioned, that "[r]egardless of whether class members are given opt-out rights, the court is still required to ensure that representation is adequate" and that the settlement is fair. See Epstein v. MCA, Inc., 50 F.3d 644, 667 (9th Cir. 1995), rev'd on other grounds, 116 S. Ct. 873 (1996). Moreover, this Court has emphasized that adequacy of representation must be scrutinized with great care. Id.; see also Larson v. Dumke, 900 F.2d 1363, 1367 (9th Cir.) (listing factors required for adequate representation), cert. denied, 498 U.S. 1012 (1990). And the district court must assume a far more active role than it would play in traditional bipolar litigation. Epstein, 50 F.3d at 667.
The procedural requirements for class actions, while governed primarily by Rule 23, are rooted in due process. See Crawford v. Honig, 37 F.3d 485, 487 n.2 (9th Cir. 1994) (due process in class actions for money damages requires adequate notice, adequate representation, and an opportunity to opt out); see also Brown v. Ticor Title Ins. Co., 982 F.2d 386 (9th Cir. 1992), writ dismissed as improvidently granted, 114 S. Ct. 1359 (1994). (See Footnote 10) Because "settlement of a class action is fundamentally different," Epstein, 50 F.3d at 667, the district judge plays a special role in safeguarding absentee interests. See Class Plaintiffs v. City of Seattle, 955 F.2d 1268, 1278 (9th Cir.), cert. denied, 506 U.S. 953 (1992); Mendoza v. United States, 623 F.2d 1338, 1346 (9th Cir. 1980) ("Court must be well informed of the views of objectors, and serve as a guardian of absentee interests.").
In this case, however, the district court did not analyze the Rule 23 criteria. There was apparently no hearing at the preliminary approval stage and there appears to have been no evaluation of the Rule 23 factors or the fairness of the settlement before the district court authorized the mailing of notice of the settlement to millions of class members. D.E. 18-19. Once the notices had been sent, there was, as always, a certain hydraulic pressure favoring approval of the settlement. See Mars Steel, 834 F.2d at 680-81. Subsequently, the court never evaluated the adequacy of representation by the class representative or class counsel or even considered who are the class representatives. Compare In re California Micro Devices Securities Litig, 1996 U.S. Dist. LEXIS 1361 (N.D. Cal. 1996) (substituting class representation after concluding that named plaintiffs would not fairly and adequately represent proposed class).
Nor did the district court ever consider the applicability of diverse state laws upon the decision to certify the class under Rule 23(b)(3). Subsumed within the Rule 23(b)(3) inquiry is consideration of how variations in state law affect predominance and superiority questions. See Castano, 84 F.3d at 741. This ensures that the interests of class members from states with quite diverse rights and remedies are adequately served. After all, a federal district court may not apply a generalized federal common law of product liability, see In re Asbestos School Litigation, 789 F.2d 996, 1007 (3d Cir. 1986), cert. denied, 479 U.S. 852 (1986), as such an approach would be at odds with the mandate of Erie R.R. v. Tompkins, 304 U.S. 64 (1938). (See Footnote 11)
In giving guidance to the district courts, Objectors ask this Court to hold explicitly that district courts must scrutinize closely requests for settlement class certification and preliminary settlement approval. Certainly, the district court should not issue a final order until it has independently made all of the Rule 23 findings. Moreover, a district court reviewing such settlement class actions must familiarize themselves with the negotiation process between class counsel and defendants including the adequacy of counsel's discovery and the vigor of class counsel's prosecution. General Motors, 55 F.3d at 791, 803-04. Because of the special risks in class action litigation (and particularly in settlement classes) that a great number of people can be bound without consenting to suit, class actions require an expanded role for the court quite different from conventional litigation. Id. at 784.
Rule 23(a)(4) prohibits a court from certifying a class without first ascertaining that it will receive adequate representation. Adequacy of representation is a due process requirement, and not merely a prudential consideration. See Matsushita Elec. Indus. Co. v. Epstein, 116 S. Ct. ---, ---, 64 U.S.L.W. 4101, 4107 (U.S. Feb. 7, 1996 No. 94-1809) (Ginsburg, J. concur and dissent); Phillips Petroleum Co. v. Shutts, 472 U.S. 797, 812 (1985) (citing Hansberry v. Lee, 311 U.S. 32, 42-43, 45 (1940)). Under Rule 23(a)(4), the district court must ensure that the class representative will serve as an independent and sufficient monitor of the class's interests and that his or her interests are truly aligned with those of the class. See In re California Micro Devices, 1996 U.S. Dist. LEXIS at *9.
While the settlement itself may be some indication of the adequacy of representation, see, e.g., Gonzalez v. Cassidy, 474 F.2d 67, 75 (5th Cir. 1973), the fairness of a settlement will not mitigate the lack of adequate representation. As with any due process consideration, adequate representation is an independent requirement that is assumed to benefit the class. See Goldberg v. Kelly, 397 U.S. 254 (1970); Carey v. Pyphus, 435 U.S. 274 (1978). "No one can tell whether a compromise found to be 'fair' might not have been 'fairer' had the negotiating [attorney] possessed better information or been animated by undivided loyalty to the cause of the class." In re General Motors Engine Interchange Litig, 594 F.2d 1106, 1125 n. 24 (7th Cir.), cert. denied, 444 U.S. 870 (1979). Vigor of representation and competency of prosecution are factors for the district court to consider. Larson, 900 F.2d at 1367. A settlement in which the defendant has not objected to an exorbitant fee request and in which "plaintiffs' claims are being compromised for no or merely speculative consideration" gives rise to "at least the appearance of impropriety on the part of class counsel." See In re Ford Motor Co. Bronco II Prods. Liab. Litig., 1995 U.S. Dist. LEXIS 3507, *25 (E.D. La. 1995) ("Ford Bronco").
In this case, class counsel pled numerous causes of action seeking money damages. However, after having pled those claims, class counsel failed to undertake even the most obvious discovery. Counsel's lack of investigation is remarkable considering the credible evidence in the public record that Chrysler knowingly marketed a dangerously defective product, engaged in false or misleading advertising, knowing all the while that the latches fell well below industry standards. Appallingly, not a single deposition was taken by class counsel in this case or the state court actions. (See Footnote 12) Compare General Motors, 55 F.3d at 801, 813-14 (criticizing the stewardship of counsel and noting concerns because the settlement provided no cash to class but substantial rewards to counsel for little work).
For example, class counsel appear to have been aware of the widely-circulated "1990 Cook Memorandum," E.R. 349-50, indicating that Chrysler knew that the latches fell significantly below industry standards and could be remedied for as little as twenty five cents per car. Nonetheless, they did nothing to uncover the corporate decisions surrounding Chrysler's decisions not to substitute the better latch. Even though class counsel were well aware that Paul Sheridan, former Chair of the Chrysler Minivan Safety Leadership Team, was fired for allegedly disclosing corporate "secrets" and had valuable information about internal Chrysler decisionmaking--information pertaining directly to proof of scienter--they never even sought to depose him. E.R. 308-10; see also General Motors, 55 F.3d at 814 (finding that class counsel's failure to depose General Motors engineer raised serious questions about adequacy of representation).
Rather than admitting that the class had potentially valuable claims against Chrysler and its authorized dealers, class counsel sought to devalue those claims. For example, they rejected out of hand that reduced resale value could provide a basis for recovery. Compare General Motors, 55 F.3d at 816 (noting that diminished resale value might represent one method of measuring damages).
Before certifying a class, the district court must evaluate adequacy of representation as a predicate to evaluating the fairness of the settlement. Reviewing the adequacy of the settlement is no substitute for proper Rule 23 certification. Objectors ask this Court to explicitly so hold.
Rule 23(b)(3) protects the same interests in fairness and efficiency as does Rule 23(a). Georgine v. Anchem Prods., 83 F.3d 610, 625 (3d Cir. 1996), cert. pending, No. 96-2270 (U.S. Aug. 19, 1996). Under Rule 23(b)(3), a class action must be the superior method of adjudicating the case and common questions of law must predominate. While variations in state law do not always preclude class certification, class proponents must demonstrate the commonality of substantive law applicable in each of the various states included in the class. Phillips Petroleum Co. v. Shutts, 472 U.S. at 821-23. Class proponents must engage in an "extensive analysis" of state law variances including whether variations "can be effectively managed through creation of a small number of subclasses." Walsh v. Ford Motor Co, 807 F.2d 1000, 1017 (D.C. Cir. 1986), cert. denied, 482 U.S. 915 (1987). Without such an analysis, class certification may impose a tougher legal standard upon some members of the class than they would enjoy under the laws of their own state. See, e.g., Osborne v. Subaru of America, Inc., 198 Cal.App.3d 646, 656 (Cal. App. 1988) (affirming denial of nationwide class certification in suit brought on behalf of owners of 1969-76 autos alleged to suffer from engine problems and noting significant variances in state law; for example, California's law of implied warranty requires privity while other jurisdictions do not). In a multi-state class action "variations in state law may swamp any common issues and defeat predominance." Castano, 84 F.3d at 741 (citing Georgine, 83 F.3d at 618, and In re American Medical Sys., 75 F.3d 1069, 1085 (6th Cir. 1996)). However difficult it may be for the district court to decide whether common questions predominate over individual questions, it should not sidestep "this preliminary requirement" of Rule 23. See In re Hotel Tel. Charges, 500 F.2d 86, 90 (9th Cir. 1974) (in multi-state consumer fraud class action, stating that "no possibility that common questions can predominate over individual").
Class counsel did not engage in any analysis of state law nor, despite objections, did the district court require them to do so. Compare Castano, 84 F.3d at 742-44 (criticizing district court and class counsel's survey of state law variations as inadequate). Instead, class counsel relied heavily on California law as a yardstick for measuring potential recovery. In Walsh, the court criticized the district court and class counsel for treating: "the 'which law' matter as academic. They say no variations in state warranty laws relevant to this case exist. A court cannot accept such an assertion 'on faith.' Appellees, as class proponents, must show that it is accurate." 807 F.2d at 1016.
That this action settled does not make differences in applicable law irrelevant. To the contrary, because the perceived strength or weakness of the plaintiffs' claims was necessarily a factor in the settlement that was reached, and the settlement appears to have been based on California law or an undefined federal common law, class members may have received a far different deal if their claims had been assessed under the laws of their own jurisdictions. Cf. Phillips Petroleum Co. v. Shutts, 472 U.S. at 814-23. Objectors presented evidence of remedies available to some class members against manufacturers and dealers under state consumer protection statutes, common law theories and "lemon laws." See, e.g., Mikos v. Chrysler Corporation, 404 N.W. 2d 783 (Mich. App. 1987) (attorneys fees under Michigan Consumer Protection Act where breach of implied warranty of merchantability against Chrysler dealer); see also D.C. Code Ann. Sec. 28-3905(K)(1) (action for treble damages, attorneys fees, punitive damages, and other relief for breach of warranty). Georgia, Alabama and Florida objectors (appellants in 96-15043 and 96-15056) described the substantially greater rights to recovery under the laws of their states including state RICO laws. For some consumers, the lemon laws could have provided refund or replacement of their vehicles and additional damages recovery. And fourteen states make violation of the lemon law a violation of the states' unfair and deceptive trade practices statutes (UDAP) which entitles consumers to additional remedies such as punitive damages. See "The Good, The Bad, and The Rest: State Lemon Laws and Protection for Consumers," Consumer and Personal Rights Litigation Newsletter 8 (Nov. 1994) (American Bar Ass'n). See also Fl. Stat. Ann. Sec. 681.111 (West Supp. 1995) (lemon law); Fl. Stat. Ann. Sec. 501.2075 (West Supp. 1995) (UDAP) (civil penalty of up to $10,000 for willful violations); W. Va. Ann. Code Sec. 46A-6A-4(b)(3) (damages for annoyance and inconvenience related to the manufacturer's breach of warranty).
"The dictates of state law may not be buried under the vast expanse of a [national] class action. The parties' rights under state substantive law must be respected, and if that is not possible in a class action, then that procedure may not be used." In re School Asbestos Litig., 789 F.2d at 1007; see also Castano v. American Tobacco Co., 84 F.3d 735, 741 (5th Cir. 1996); In re Rhone-Poulenc Rorer, Inc., 51 F.3d 1293 (7th Cir.), cert. denied, 116 S. Ct. 184 (1995).
This does not mean that a nationwide class cannot be certified, nor that a settlement cannot be approved, but it does mean that the parties (in crafting a settlement), and the district court (in certifying a class), must account for differences in law among the various jurisdictions. Although Objectors raised these concerns in their submissions to the district court, they received no response on the record from the court, in violation of this Circuit's precedent. See Mandujano v. Basic Vegetable Prods., 541 F.2d 832, 836 (9th Cir. 1976). Before certifying a nationwide class, the district court should consider variations in state law, and whether subclassing is appropriate in order to give certain class members the benefit of their state law. See Shutts, 472 U.S. at 814-23.
Rule 23(e) of the Federal Rules of Civil Procedure requires judicial approval of all class action settlements. This oversight is essential. Because class actions are effectively controlled by the lawyers for the class rather than the absent (or even the named) class members, there is an ever-present danger that class counsel may sacrifice their clients' interests in exchange for a handsome fee. See General Motors, 55 F.3d at 800; Mars Steel, 834 F.2d at 681; see also Epstein, 50 F.3d at 667. The district court must therefore ensure that the settlement is fair, adequate and reasonable before approving it. See Officers for Justice v. Civil Service Comm'n of San Francisco, 688 F.2d 615, 625 (9th Cir. 1982) (specifying factors for reviewing fairness of settlement), cert. denied, 459 U.S. 1217 (1983).
In this case, the district court abused its discretion by approving the settlement because it provides no tangible benefit to class members other than what they are already entitled to receive under Chrysler's previously announced Service Action. The district court's error was in approving a settlement, the centerpiece of which was a promise to replace latches on over four million minivans, when Chrysler had already made that commitment to federal regulators and to millions of minivan owners, and when there was no reason to believe Chrysler did not intend to fulfill its commitment.
The burden of proving the fairness of a settlement rests squarely on its proponents. See Newberg on Class Actions Sec. 11.42 (3d ed. 1992); see also 3B Moore's Federal Practice Sec. 23.80  (2d ed. 1987). Rather than requiring class counsel to demonstrate the adequacy of the settlement by comparing it with what the class would receive independent of the settlement, however, the district court reduced the criteria for approval to "what is the class getting compared with what they are giving up?" E.R. 397. By framing the question this way, the district court erred in approving the settlement as "fair, adequate and reasonable" in three, crucial respects.
First, as explained in Part A, the district court erred by approving the settlement in the face of uncontroverted evidence that Chrysler would conduct the Service Action it had negotiated with NHTSA whether or not the settlement was approved. Second, as explained in Part B, in identifying the value of the settlement as it contractually committing Chrysler to replace the latches, the district court overlooked evidence that the vaunted "enforceability" of the settlement was of dubious value to class members. Third, as explained in Part C, the district court improperly evaluated the burdens imposed on the class through release of their state law claims.
In approving the settlement, the district court ignored uncontested evidence that class members would receive the two primary purported benefits of the settlement whether or not the settlement was approved: the free replacement latch and an extensive owner awareness and notification campaign. The settlement agreement, like any other contract, "is governed by familiar principles of contract law." Jeff D. v. Andrus, 899 F.2d 753, 759 (9th Cir. 1989); see also Cohen v. Resolution Trust Corp., 61 F.3d 725, 729 (9th Cir. 1995). Because of the special role of the district court under Rule 23(e), however, a class action settlement must include the exchange of adequate consideration, a tangible benefit; the proverbial "peppercorn" for consideration is not sufficient for class action settlements. Jamison v. Butcher & Sherrerd, 68 F.R.D. 479 (E.D. Pa. 1975). In Jamison, the court disapproved a securities class action settlement because the class was entitled to receive "nothing beyond that to which it was entitled under the Securities and Exchange Commission's order." Id. at 482. The court noted that, under the settlement, the class members would be "releasing their claims without consideration." Id.
Significantly, the court in Jamison relied upon this Court's decision in Norman v. McKee, 431 F.2d 769 (1970), cert. denied, 401 U.S. 912 (1971), which presented facts similar to those presented here. In Norman, as here, class lawyers brought a lawsuit at the same time that a federal government regulator, the SEC, was investigating. A month before settlement in the class action was reached, the SEC issued a cease and desist order requiring restoration of funds and enjoining defendants. Comparing the proposed settlement to the SEC order, the district court rejected the settlement on the ground that the settlement did not confer any benefit to the class other than what government regulators had already secured. Norman v. McKee, 290 F. Supp. 29, 33 (N.D. Cal. 1968).
This Court affirmed, concurring with the district court "that no consideration existed . . . when the SEC settlement was compared to the proposed settlement of this suit." Norman, 431 F.2d at 774. See also Ford Bronco, 1995 U.S. Dist. LEXIS at *19 (holding that a settlement obliging defendant to provide safety warning stickers already required by federal law, was void for lack of consideration: "[T]he proposed settlement therefore merely provides plaintiffs with information to which they were already entitled and confers no additional value in consideration for the release of plaintiffs' claims.").
As in Norman, Jamison and Ford Bronco, this settlement lacks an exchange of valuable consideration and is, therefore, not fair, reasonable or adequate. The district court erred by not asking whether it was necessary to impose the burdens of the settlement upon the class in order to achieve the putative benefits. The evidence before the district court showed that valuable claims were being compromised for benefits otherwise available to class members: Chrysler admitted that even a class member that opted out of the settlement was entitled to receive the liftgate latch. E.R. 53. Chrysler admitted that it would deduct the monies spent on the Service Action against the $14 million and, at the April 29, 1996 hearing, stated that it had already spent approximately $10 million on the Service Action, even though it had only thus far achieved what objectors calculated to be a 13% cumulative response rate. E.R. 579. And, finally, Chrysler agreed that its Assistant General Counsel's statement that its "agreement" with NHTSA to conduct the Service Action was an "irrevocable commitment" could be accepted as accurate and that "[t]here's no doubt that Chrysler" would probably implement the Service Action without regard to the class action settlement. E.R. 579.
The district court, however, did not grapple with this first fundamental point--that replacement latches are being provided under the Service Action independent of the settlement and even those who opted out would receive the free latch. Instead, the district judge expressed surprise at the April 29, 1996 hearing when learning that the latch replacement under the Service Action had begun in September 1995, months before the settlement's approval. E.R. 558.
In fact, the timing of the latch replacement has no relationship to the Settlement Agreement; rather all minivan owners, whether they opted-out of the settlement or not, receive the same replacement latch under the Service Action schedule devised by Chrysler and approved by NHTSA. All of the evidence in front of the district court pointed to the conclusion that the latch itself, provided to the class whether or not the settlement was approved, could not be credited as an independent benefit of the settlement.
Similarly, the district court ignored the concessions made by Chrysler in discovery that the company is counting its expenditures under the Service Action against the $14 million in the Settlement Agreement. The district court failed to ask whether this meant that any of the $14 million was independent and additional money to be spent under the settlement agreement, a fundamental question for considering the adequacy of the consideration for the settlement under Norman v. McKee. Otherwise, requiring Chrysler either to achieve a 60% response rate or to spend $14 million, in effect, required them to do nothing other than what they already are doing under the Service Action. An agreement that requires the defendant to do the same or less than they have independently agreed to do cannot be said to justify release of valuable claims. Compare Norman, 431 F.2d at 774.
Moreover, the district court adopted wholesale the arguments of counsel that it could have fought NHTSA over the latch design, rather than crediting the factual evidence before it which indicated that Chrysler committed itself to undertaking the Service Action in the Spring of 1995, including redesign of the latches, E.R. 176, and that there was no factual basis for a finding that, as a practical matter, Chrysler could have and certainly would not have reneged on this promise made in numerous public statements, television and print ads, millions of letters to minivan owners and dealers, and to NHTSA, the federal regulatory agency given jurisdiction over vehicle defect investigations and highway safety.
The district court did not require the proponents of the settlement to provide any evidence that the expenditure of $14 million over eighteen months could reasonably be expected to achieve a 60% response rate. The lack of factual support for this basic goal of the settlement (Par. 9) is particularly significant in light of the expert affidavits submitted by objectors stating that Chrysler was extremely unlikely to achieve a 60% response rate even with a $14 million expenditure. E.R. 230-82.
This settlement was at least as, if not more, lacking in value for the class than those rejected by the courts in General Motors and Ford Bronco. In General Motors, while the Third Circuit held that the value to the class was inadequate as a matter of law, there was at least some evidence presented that some class members, albeit a very small percentage of the total class, would be able to redeem the coupons offered in settlement. 55 F.3d at 807-10. Even in Ford Bronco where the consideration offered for settlement--a flashlight, an atlas, and a warning sticker already required under federal law--was essentially a joke, class members at least would have received a tangible item. 1995 U.S. Dist. LEXIS at *19. Here, by comparison, the settlement agreement did not provide any tangible benefit to the class. Objectors' experts explained that a fair settlement would have to include incentives to minivan owners--such as, free tune-ups, oil changes, air filters, lubrications--to maximize response rate and to compensate minivan owners for the inconvenience associated with the latch replacement. E.R. 230-41, 522-27. Because of the lack of benefit alone, the district court's approval of the settlement should be reversed.
The district court's second error was accepting class counsel's argument that the enforceability of the settlement agreement conferred sufficient benefit to merit its approval. But in making this enforceability argument, class counsel never specified the circumstances under which the court might be called upon to "enforce" the settlement-- against Chrysler which was already conducting the Service Action before the settlement's approval (indeed even before notice of the settlement was mailed), or in isolated instances against individual dealers who are not parties to the settlement (except for the release provision) and over whom the district court likely has no jurisdiction. Under either scenario, there are a number of legal and factual reasons why the agreement cannot be characterized as conferring a judicially enforceable remedy on class members.
1. Class counsel insisted that the class receives a benefit of judicial supervision over the Service Action. But even Chrysler recognized class counsel's error. E.R. 90. In fact, the terms of the settlement do not grant the Court a role in assessing (a) the adequacy of the replacement latch, (b) the pace at which the latches are replaced, (c) the appropriateness of Chrysler's expenditures of the $14 million, nor even (d) the power to force Chrysler to achieve any particular response rate--60% is only an aspirational goal, not an enforceable one. Par. 9.
2. Class counsel contended that under the settlement a minivan owner can seek an order of specific enforcement of the settlement agreement if Chrysler fails to provide an individual owner the replacement latch. Yet the notice advising class members of the settlement did not inform them of this supposed "benefit." The summary of terms never recited, for example, "If this agreement is approved, and if you are having trouble obtaining a replacement latch, you or your lawyer will be able to ask the district court for assistance, and the court can enter an order directing Chrysler or your dealer to replace the latch on your minivan." It is unlikely that minivan owners possess a lawyer's understanding that (a) a settlement agreement is a contract, and (b) contract remedies are available for breach of the terms of any settlement agreement. Most minivan owners interact only with their dealers, not Chrysler, and thus most class members--even those who read the notice word-for-word--would hardly understand they enjoy this supposedly valuable "right."
Even if class members understood that they possessed this "right," class counsel's argument rests on a series of highly improbable occurrences: A minivan owner living in, for example, Tacoma, Washington, seeks a replacement latch from her dealer. She is told either that there is no replacement latch available, or that it is unnecessary to replace the old latch, or that the new latch will cost her some amount. Class counsel posit that under the settlement this minivan owner could then contact class counsel in San Francisco, or contact the district court directly, and ask them or the court to take some kind of enforcement action.
In order, therefore, for a minivan owner to take advantage of this "judicial remedy" she must somehow know the following facts: the latch presents a real safety hazard, her dealers' representations violate the settlement agreement, class counsel will act as her counsel free of charge, and she can request a specific enforcement order against her dealer in Tacoma, Washington. She must know all of this even though she has received no notice to this effect.
Even if this minivan owner can divine all of these facts, quite a few minivan owners will hesitate before contacting a distant law firm. The average consumer will be more likely to call Chrysler's 1-800-MINI-VAN line or the Department of Transportation's toll free number. In fact, they are more likely to call the local media, the local consumer affairs department, the state attorney general, or even the Center for Auto Safety, than to contact class counsel. The district court completely overlooked these factual improbabilities in crediting the enforceability of the settlement as a benefit to the class.
3. The settlement fails to provide any judicially manageable standards for ordering specific enforcement. The settlement has no judicially-enforceable time frame for latch replacement. "The phasing for implementation of the Service Action . . . will be under the control of Chrysler and will be with the approval of NHTSA." E.R. 9 (Par. 8.1.1). Therefore, even if a class member knew enough to seek an injunction to compel replacement of their latch, they would walk away empty-handed because the latch need not be replaced at any given time under the settlement.
4. The settlement does not require the replacement latches to meet any independent performance standards or design requirements. "[T]he design of the replacement latches will be under the control of Chrysler and will be with the approval of NHTSA." E.R. 9 (Par. 8.1.1). Indeed, the replacement latch still falls short of federal safety standards effective in 1997 as it lacks a secondary latching system. E.R. 240-41, 282-307. Therefore, those class members who wish to pursue Chrysler for a replacement latch with a secondary latching system are precluded from doing so. E.R. 329-36.
All in all, then, it is impossible to say that the agreement confers a valuable right when (a) the text of the agreement does not confer a right that individuals can enforce, (b) the text fails to provide class members with any notice that such a right is being conferred, and (c) the allegedly enforceable right is unlikely to be available to most class members. The benefit of judicial enforceability is so speculative as to be of no practical value to the class, especially when compared to NHTSA's ongoing enforcement powers, see 49 U.S.C. Secs. 30118, 30119, 30121, 30163(a), 30165(a), and cannot provide sufficient consideration to support the release of class members' claims. The district court, therefore, erred in accepting representations by class counsel and Chrysler that the conversion of Chrysler's Service Action into a judicial order provided adequate benefit.
The district court's third crucial error in evaluating the fairness of the settlement was its improper weighing of the burdens imposed upon class members through the release of claims. Apart from wiping out common law claims, the release of claims extinguishes lemon law claims under which some minivan owners would have had the right to pursue replacement or refund of their vehicle. Lemon laws "afford the manufacturer, through its authorized dealers, a reasonable opportunity to correct the condition of the vehicle, but if the defect is not remedied within a specified period, the purchaser is entitled to return the vehicle and demand a refund of the purchase price or replacement of the vehicle." Consumer and Personal Rights Litigation Newsletter, supra, at 8. Lemon law legislation permits buyers of faulty automobiles to rid themselves of the vehicle after a reasonable number of attempts at repair. Chrysler Motors Corp. v. Flowers, 803 P.2d 314, 316 (Wash. 1991); see also Hughes v. Chrysler Motor Corp., 542 N.W.2d 148 (Wis. 1996). The automakers buy back at least 50,000 vehicles under the lemon laws every year. E.R. 230-42.
Certain states have "safety lemon" laws which only require one repair attempt of a safety hazard. E.R. 230-42. These statutory rights may have been particularly useful for the millions of minivan owners for whom latch replacement has been delayed for quite some time. For some owners whose minivans have other defective conditions, naming the latch as one qualifying defect may have allowed the owner to trigger the protection of their state's law. See, e.g. Ark. Code Ann. Sec. 4-90-410(a)(3) (Michie Supp. 1993).
Because Chrysler is under no enforceable timetable to remedy the latch defect, lemon laws could allow minivan owners who experience substantial delays waiting for their latches, to pressure Chrysler for more expedient relief. Some states make coverage of the lemon laws coterminous with the term of the written warranty, such that those with a 7 years/70,000 mile warranty would have had time to invoke protection of their state's law. See Hawaii Rev. Stat. Sec. 4811-2; N.H. Rev. Stat. Ann. Sec. 4811-2.
Considering that all minivan owners were already entitled to receive a replacement latch under Chrysler's previously announced Service Action, the release of claims unfairly requires class members to forfeit their rights under state law, including the lemon laws, for relief they already would receive. While it is always difficult to assess precisely the value of claims that have not been adequately developed or tried, it is all too easy to deflate their value. Even if only a minority of class members had claims worth substantial money under their state laws, the benefits of the settlement were either nil or so illusory that they cannot be said to justify the burden of imposing the release even upon a minority of the class.
* * *
The latch replacement campaign was underway whether or not the settlement was approved, the value of the settlement agreement's "enforceability" was greatly exaggerated by class counsel, and the release of claims imposed burdens on the class without reciprocal benefits. The district court's approval of this settlement was an abuse of discretion.
The district court's fee award should be reversed because class counsel provided no evidentiary basis for determining a reasonable fee, because the benefit to class was so speculative that its value, if any, could not be reasonable ascertained, and because the court improperly abdicated its responsibility to independently review the fee request.
In the federal courts, attorney's fees are calculated in one of two ways. First, under the lodestar method, the fee is determined by multiplying the lawyers' reasonable hourly market rates by the number of hours reasonably spent on the litigation. See Hensley v. Eckerhart, 461 U.S. 424, 434 (1983). The lodestar method is the exclusive means for calculating fees under fee-shifting statutes, where the losing party pays the fee directly to the prevailing party. Id.; Blum v. Stenson, 465 U.S. 886 (1984).
Second, under the percentage-of-the-fund method, the plaintiff's attorney is awarded a percentage of the amount that has been recovered in the litigation. Alyeska Pipeline Co. v. Wilderness Society, 421 U.S. 240, 257 (1975); In re Washington Public Power Supply Sys. Litig., 19 F.3d 1291, 1294 n.2 (9th Cir. 1994). As its name indicates, this method is used in "common fund" cases, i.e., where "a party [has] preserv[ed] or recover[ed] a fund for the benefit of others in addition to himself...," Alyeska, 421 U.S. at 257, and no fee-shifting statute provides a basis for the award. Some courts have required the use of the percentage method in common-fund cases. See, e.g., Camden I Condominiums v. Dunkle, 946 F.2d 768 (11th Cir. 1991). But even in common fund cases, certain jurisdictions require use of the lodestar method on the theory that it provides an objective measure of an attorney's services, see, e.g., In re Agent Orange Prod. Liab. Litig., 818 F.2d 226, 232 (2d Cir. 1987), and prevents payment of exorbitant fees that result from taking a percentage of a large common fund. Id. *11; cf. Washington Public Power, 19 F.3d at 1295.
The most recent trend, exemplified by this Court's decision in Washington Public Power, is a hybrid approach, where the district court has discretion to use either the lodestar or the percentage-of-the-fund method depending on the circumstances of the case. See Washington Public Power, 19 F.3d at 1295 & nn.2-3; see also, e.g., Rawlings v. Prudential-Bache Properties, Inc., 9 F.3d 513 (6th Cir. 1993). In those jurisdictions, the courts are encouraged to look at both methods, cross-checking the propriety of the percentage award with a lodestar calculation to assure that the fee is not excessive. E.g., General Motors, 55 F.3d at 822; see Washington Public Power, 19 F.3d at 1297; Bowling v. Pfizer, 922 F. Supp. 1261, 1278-80 (S.D. Ohio 1996); Edelman v. PSI Associates II, Inc., 147 F.R.D. 217, 219-23 (C.D. Cal. 1993) (lodestar should be used where unclear that settlement provided substantial benefit to class).
Here, however, the district court failed to use either of these methods. Instead, the plaintiffs' lawyers simply agreed with the defendant, after mediation, that they would be paid $5 million in fees, plus $200,000 in expenses. E.R. 460-62. The problem with this approach is that the district court accepted that an agreement has been reached--without more--as conclusive evidence that the amount was fair to class members. This is not enough to satisfy the requirements of Rule 23. There may be situations in class litigation where a defendant would be quite happy to pay a premium to class counsel to secure dismissal of all claims on terms that are unfavorable to class members. In that situation, the mere fact that the parties agreed on how much class counsel should be paid cannot be the sole basis upon which to base a fee award. A district court is still be obliged to examine the reasonableness of the proposed figure, using the lodestar and/or percentage methods, to calculate a reasonable sum.
Here, the district court abandoned both the lodestar and percentage approach, and held that
[t]he attorneys' work did produce a result, and since there is no adverse impact to the class on the award of fees, and since the amount of fees has been agreed to by both sides, and since the amount was conducted in arms' length negotiation under the supervision of Judge Fannon, I don't see any reason to substitute my personal values or personal opinions on what has been done by those. I think it's within the realm of reason.
E.R. 485. Plaintiffs' counsel never submitted any time records, or even estimations thereof, nor did the district court demand such information, despite appellants' objection. The court thus awarded the full fee request of $5 million, plus $200,000 in expenses.
The district court's decision to award class counsel's $5 million fee request was motivated by its erroneous belief that, because the "fees would be paid by Chrysler," "there would be no charge to the class." E.R. 484. With all respect, this statement misapprehends the basic economic realities of class action settlements. "Any settlement represents a total value figure that one party is willing to pay to end the controversy." Bloyed v. General Motors Corp., 881 S.W.2d 422, 435 (Tex. App. 1994), aff'd, 916 S.W.2d 949 (Tex. 1996). Thus, "[a]ttorney's fees, even though they may not be technically deducted from the amount paid to the litigants, represent an integral part of the overall amount that the settling party is willing to pay, and as such, they have a direct effect on the net amount that will be ultimately paid to the litigants." Id.
Every court to have considered this contention has held that fee requests are not shielded from scrutiny simply because the defendant pays the fee separate from the class recovery. For instance, in General Motors, 55 F.3d at 808, as in this case, the defendant agreed to issue non-monetary relief to the class and, separately, to pay plaintiffs' counsel a fee to be determined by the court. On appeal, class counsel claimed that the absent class members did not have standing to challenge the fee. The Third Circuit noted that, since the "defendant is interested only in disposing of the total claim asserted against it[,]... the allocation between the class payment and the attorneys' fees is of little or no interest to the defense." Id. at 819-20 (quoting Prandini v. National Tea Co., 457 F.2d 1015, 1020 (3d Cir. 1977)). Because of these "practical realities," an agreement by the defendant to pay class counsel's fees "clearly does impact [the class members'] interests." Id. at 820. Thus, General Motors concluded, "class counsel's argument that objectors have no standing to contest the fee arrangement is patently meritless." Id.; accord Bloyed, 881 S.W.2d at 435; see also Weinberger v. Great Northern Nekoosa Corp, 925 F.2d 518, 522-24 (1st Cir. 1991) (even where defendant agrees to pay fee, judicial scrutiny is necessary to police potential conflict between class members' interests and those of fee-seeking attorneys). In short, the district court had a duty to review the fee award to protect the interests of the class members, and should not have approved an award merely because counsel was able to negotiate their fee. (See Footnote 13) The use of mediation does not automatically assure that the requirements of Rule 23 have been met and that the figure is fair to the class The district court erred in relying unduly on the existence of mediation as the basis for finding that the fee award here was proper.
The district court also relied on the parties' contention that they did not begin to negotiate the amount of the fee until the merits had been settled. This is irrelevant for two reasons. First, although objectors have no evidence with which to challenge the settling parties' assertion, as will usually be the case, this is a fact only because the settling parties say that it is. Indeed, one of the purposes of requiring independent court review of fee decisions is to prevent the potential for "sweetheart deals" and to override the inherent conflict of interest between the class and its attorneys by assuring that the fee is reasonable under applicable law. Great Northern Nekoosa, 925 F.2d at 524; see also Ford Bronco, 1995 U.S. Dist. Lexis at *27-*28. (See Footnote 14)
Second, regardless of whether the merits negotiations were completed when the fee negotiations began, Chrysler was aware throughout that it would be required to pay a fee. Thus, unless it was blind to the economic realities, Chrysler would have taken the fee into account in its merits negotiations. Bloyed, 881 S.W.2d at 435. At bottom, the $5.2 million attorneys' fee and expense agreement was possible only as a consequence of the class action suit, and, thus, that money became the property of the class in the first instance. Thereafter, it was the court's obligation--and only the court's obligation--to decide how much of the value of the suit had been earned by class counsel, and how much should be retained by the class in accordance with applicable law.
As noted above, under this Court's decision in Washington Public Power, either a lodestar or percentage method may be appropriate in determining fees in a common-fund case. In affirming a lodestar award, this Court indicated that the method chosen is dependent on the facts of the case. 19 F.3d at 1296. Under the particular facts here, the district court abused its discretion in not using the lodestar method for two reasons.
First, under paragraph 14 of the settlement agreement, Chrysler was obligated to pay the fee. Moreover, the settlement did not establish a common fund of cash out of which a fee can be paid. Thus, although the fee was not paid under a fee-shifting statute, the fee here was much more analogous to the classic fee-shifting arrangement, where the fee is paid by the defendant to the plaintiff's lawyers, than to a common-fund situation, where the fee is taken from a fund otherwise payable to the plaintiff class. See Edelman, 147 F.R.D. at 219-23. Thus, as noted earlier, since in fee-shifting situations courts universally apply a lodestar method, the district court should have done so here.
Second, even assuming that a percentage-of-the-fund method could be used in some cases where the defendant pays the fee, in order to use a percentage method by definition, the court has to be able to determine the value of the common fund. See General Motors, 55 F.3d at 822. That cannot be done here. As explained in Part II above, from the class members' perspective, the settlement has either no value or completely speculative value because, among other reasons, it does nothing more than what Chrysler had already committed to do.
Moreover, there is no cash fund with a readily ascertainable value. Nor did the district court find that this litigation caused the defendant to fix the latches. And even if the litigation had been the sole motivating force behind Chrysler's retrofit decision, it would be impossible to determine the value of retrofitting the minivans with any reasonable degree of precision, among other reasons, because class counsel offered absolutely no evidence of how many vehicles could expect to be retrofitted as a result of the settlement. Compare Edelman, 147 F.R.D. at 221-22 (lodestar only appropriate method where defendant not required to set up a cash fund and no way to determine what benefit to class will be).
Under such circumstances, determining a value of a "common fund" or a "common benefit" from which to calculate a percentage fee would be pure guesswork, and a lodestar method would be the only reasonable alternative. Washington Public Power, 19 F.3d at 1297 (under circumstances use of percentage method "would be like picking a number out of the air"). (See Footnote 15)
The district court apparently agreed, saying that it did "not pay much attention" to class counsel's efforts to assign a dollar value to the settlement. E.R. 485. However, for the reasons stated above, the appropriate--and only judicially-sanctioned--alternative was for the district court to calculate a reasonable lodestar fee, not to acquiesce in Chrysler's agreement to pay class counsel $5.2 million in fees and expenses. For these reasons, the fee and expense award should be reversed. (See Footnote 16)
For the reasons set forth above, Objectors respectfully request that this Court reverse the district court's certification of a nationwide class, approval of the class action settlement, and the award of attorneys' fees and costs.
Colette G. Matzzie
ALTSHULER, BERZON, NUSSBAUM, BERZON & RUBIN
These consolidated appeals are also consolidated with Nos. 96-15044 and 96-15056. There are no other related cases pending.
Pursuant to the Ninth Circuit Rule 32(e)(4), I certify that the opening brief is proportionally spaced with Times Roman typeface of 14 points and contains 13,337 words.