Testimony of Brian Wolfman, Staff Lawyer, Public Citizen Litigation Group
Testimony Before The Committee on Rules of Practice and Procedure of the Judicial Conference of The United States
Washington, D.C., January 22, 2002
Thank you for inviting me to appear today. I am Brian Wolfman, a staff lawyer at Public Citizen Litigation Group ("PCLG") in Washington, D.C. I have represented plaintiff classes in class action lawsuits, both early in my career as a legal services lawyer in Arkansas and since 1990 at PCLG. PCLG represents plaintiffs in class actions because it recognizes that they are enormously powerful tools for justice. Class actions compensate victims of discrimination, provide a means for reforming oppressive institutions, and deter wrongful conduct where individuals would not have had the means to sue on their own. But class actions can be abused, souring the public and political leaders, and jeopardizing the prospect of justice for ordinary citizens.
Thus, in recent years, PCLG has represented objectors in approximately 30 nationwide class action settlements in which the named representatives and their attorneys were inattentive to the needs and divergent interests of the absent class members whom they were supposed to represent. See, e.g., Amchem Prods., Inc. v. Windsor, 521 U.S. 591 (1997); In re Orthopedic Bone Screw Prods. Liab. Litig. (Sambolin), 246 F.3d 315 (3d Cir. 2001); In re Telectronics Pacing Sys., Inc., 221 F.3d 870 (6th Cir. 2000); Duhaime v. John Hancock Mut. Life Ins. Co., 183 F.3d 1 (1st Cir. 1999); In re General Motors Corp. Pick-up Truck Fuel Tank Litig., 55 F.3d 768 (3d Cir. 1995); Bowling v. Pfizer, 922 F. Supp. 1271 (S.D. Ohio), aff'd, 102 F.3d 777 (6th Cir. 1996); Clement v. American Honda Finance Corp., 176 F.R.D. 15 (D. Conn. 1998); In re Ford Motor Co. Bronco II Prod. Liab. Litig., 1995 U.S. Dist. Lexis 3507 (E.D. La. Mar. 20, 1995); see generally Reske, "Two Wins for Class Action Objectors," 82 A.B.A. Journal 36, 37 (June 1996) (highlighting Public Citizen's work representing objecting class members). A full description of PCLG's involvement in class action settlements is available at http://www.citizen.org/litigation/briefs/Class_Action/articles.cfm?ID=552.
PCLG believes that some aspects of the current proposal to amend Rule 23 will facilitate the prosecution of meritorious class actions, while further protecting the rights of absentees. Nevertheless, the proposal raises some serious concerns that we believe should be addressed before a final version of the Rule is promulgated. In the pages that follow, we comment on the proposed amendments to Rule 23 in the order in which they appear in the Advisory Committee's proposal. All page references are to the Advisory Committee's pagination contained at the top of the preliminary draft booklet released by the Judicial Conference in August 2001.
Rule 23(c)(1)(B). On page 2, lines 16-17, the Committee says that the order certifying the class must define "the class claims, issues, or defenses." We assume that the order need not "define" every issue or defense in the suit but only those that have been certified, but that is not clear. Later, in 23(c)(2)(A)(i) (p. 3, line 30), the Note says that the notice must describe "the claims, issues, or defenses with respect to which the class has been certified." For clarity, we suggest adding the "with respect to which the class has been certified" language to proposed Rule 23(c)(1)(B).
Rule 23(c)(2)(A)(i). As currently drafted, the third bulleted clause (p. 2, line 33) could be construed to suggest that an absentee must retain counsel to appear in a class action. The words "pro se or" should be inserted before "through counsel," or the phrase "with or without counsel" should be used instead of the current language. This change is particularly important in the Rule 23(e) settlement context in which thousands of unrepresented individuals receive notice and are invited to participate. They must be told that they have a right to object without hiring a lawyer.
We have two suggestions regarding opt-out rights. Our first concern relates to how opt-out rights are described to the class. Class action notices are almost always drafted by the parties and they often seek to hold down the number of opt-outs. Generally, notices explain the downside of opting out (for instance, that the class member won't be able to take advantage of class relief or be represented for "free" by class counsel), but they do not explain the advantages of opting out (for instance, that the class members will not be bound by a settlement or litigated judgment that they find insufficient and, most important, that they will have the right to litigate on their own).
For example, the original opt-out notice in the Telectronics pacemaker mass-tort settlement, MDL 1057 (S.D. Ohio), simply told the class members that "[i]f you opt out of the class, you will no longer be bound by the terms of the settlement. This means that you will no longer be represented by Class Counsel, and will not be able to recover anything under the terms of the Settlement Agreement." This kind of notice will keep the number of opt-outs artificially low because it stresses the negative attributes of opting out. It is important to use language that more neutrally describes the opt-out right. In Telectronics, PCLG negotiated a revised notice to the class that included the following language: "If you opt out, you will retain all rights you had against anyone with respect to [the allegedly defective product], which include the right, if any, to pursue an individual claim." We propose that at the end of the fourth bulleted clause of proposed Rule 23(c)(2)(A)(i) (p. 3, lines 36-37) the phrase ", including a explanation of the consequences of exclusion on members of the class." In addition, the Note should explain that the notice must neutrally describe the potential benefits and disadvantages of exclusion as discussed above.
Second, the Rule should require, in an additional bulleted clause, that the notice include an opt-out form. The Manual for Complex Litigation treats use of an opt-out form as standard operating procedure. See Manual for Complex Litigation, Third § 30.231, at 231 (Federal Judicial Center 1996); id. § 41.41, at 476 (opt-out form). However, in our experience, particularly in recent years, the parties often do not use opt-out forms and the courts have not demanded that they do so. Instead, the parties have crafted opt-out procedures that are onerous, requiring the absentee to write a letter providing all sorts of minutiae about his or her class membership. As the Manual recognizes, see id., an easy-to-use form is the best means for insuring that class members can exercise their opt-out rights if they wish to do so.
Rule 23(c)(2)(A)(ii). We support the amendment requiring notice at the certification stage to (b)(1) and (b)(2) classes. Nevertheless, we are sympathetic with those who have argued that this added obligation will increase costs to plaintiffs (and their counsel) and thus may deter the prosecution of meritorious cases, particularly (b)(2) civil rights and other injunctive actions. Thus, at the certification stage, as the proposal recognizes, the notice need not be comprehensive as it is in a (b)(3) opt-out case.
In any event, we disagree with the current wording of the provision. The notice should go to "a reasonable number of class members comprising a fair cross-section of the class," rather than simply to "a reasonable number of class members" as in the current draft. As the proposed Committee Note indicates, absent class members in (b)(1) and (b)(2) actions have an interest in monitoring adequate representation and in on-going certification issues. With regard to both topics, providing notice only to a reasonable number of class members may not be adequate if particular sub-groups among the class have interests that diverge from the class as a whole. These interests may vary based on the class members' age, ethnicity, geography (e.g., choice of law differences), whether the class member has a "future" or a present claim, when during the class period the class member's alleged injury arose, and a host of other potential differences under the circumstances of the particular case. The text of the Rule need not, of course, explain the possible divergent interests to which notice should be directed, but, as indicated, it should demand that a "a fair cross-section" of the class be notified. Of course, if sub-classes are involved, notice should be provided to a "fair cross-section" of each sub-class. This change will enhance the likelihood that the notice provided to (b)(1) and (b)(2) classes is useful and that all the class members' interests are protected.
We have one other concern regarding this subsection. On occasion, a court has required that opt-out rights be accorded to class members in cases certified under Rule 23(b)(1) or (b)(2) on the ground that at least some of the relief sought is damages-like and thus the case resembles a (b)(3) action. See, e.g., Holmes v. Continental Can Co., 706 F.2d 1144, 1154-58 (11th Cir. 1983); Officers for Justice v. Civil Service Comm'n, 688 F.2d 615, 634-35 (9th Cir. 1982); Penson v. Terminal Transport Co., 634 F.2d 989 (5th Cir. 1981). Due process, and possibly Rule 23 as currently written, demands that result. See, e.g., Brown v. Ticor Title Ins. Co., 982 F.2d 386, 392 (9th Cir. 1992), writ dismissed as improvidently granted, 511 U.S. 117, 121 (1994); In re Real Estate Title & Settlement Servs. Antitrust Litig., 869 F.2d 760, 769 (3d Cir. 1989). In cases such as those, even though technically certified under the "mandatory" provisions of the Rule, full notice ordinarily associated with (b)(3) cases is required. This concern does not require a change to the text of the proposed Rule, but the issue should be mentioned in the Committee Note.
In general, we support the amendments to Rule 23(e) because they will better protect the interests of absentees, while at the same time enabling the courts to approve settlements that are fair, adequate, and reasonable.
The final clause of the introductory paragraph of the Committee Note is confusing. It states that new Rule 23(e) will apply to settlements that are "presented to the court as a settlement class but found to meet the requirements for certification for trial as well." (p. 15). Whenever a class action settles, Rule 23(e) applies. That's true under the current rule and under the proposed rule, including in the unusual circumstance where the parties seek certification as a settlement class but the court declares on its own that the case is certifiable as a litigation class. However, we are puzzled as to why that possibility is mentioned here, since the question of settlement classes is not otherwise addressed in the proposed amendments to Rule 23. More importantly, the statement carries with it the implication that the certification standards for settlement are different from, and perhaps less rigorous than, the certification standards for litigation. That issue was before the Supreme Court in Amchem Products, Inc. v. Windsor, 521 U.S. 591 (1997), which held that "manageability" is not an issue in certifying a settlement class under Rule 23(b)(3), but that all other requisites of the Rule must be met in certifying a settlement class and, indeed, demand the court's "heightened" scrutiny. Id. at 620. Thus, it is at least arguable that, all told, certification for settlement is the more rigorous task. In any event, since the settlement class issue is not otherwise addressed in the current proposal, we recommend that this statement be dropped.
Rule 23(e)(1)(A). We agree that the court should approve voluntary dismissals of class claims as well as settlements. However, we don't know why the Committee refers to both voluntary dismissals and "withdrawals." Is there a difference between the two? Perhaps the thought is that all "withdrawals" are without prejudice, while only some voluntarily dismissals are without prejudice and others are with prejudice. Cf. FRCP 41(a). In any event, we believe that the Committee should explain the terminology (just as it explains in the Note why "settlement" is used in addition to "compromise").
One aspect of the Committee Note regarding proposed Rule 23(e)(1)(A) is troubling. The Note addresses situations where the defendant pays a special premium to a class representative to stave off the class action, i.e. where the defendant pays the plaintiff (and her lawyer) more than the value of her individual claim if she agrees to dismiss the class action. (p. 16). After saying that this scenario raises "special difficulties," the Note goes on almost to encourage that kind of buy-off, by suggesting that it would be wrong to require a suit to go forward with "unwilling" representatives and a defendant eager to buy out its opposition. The Note then suggests that a possible solution is to add new class representatives after the buy-out of the initial representatives. But if that were to occur, the defendant would not get what it wanted from payment of the premium, so a buy-out is only likely where there is an understanding (at least unspoken) that the plaintiffs and their lawyers will go away. Cf. ABA Model Rule of Prof. Resp. 5.6(b) (lawyer may not agree to restrict future practice as part of settlement of case); ABA Formal Op. 93-371 (Apr. 16, 1993) (applying Rule 5.6(b) in mass-tort class action context). Rather than tacitly encouraging this type of conduct, Rule 23(e) should prohibit it as part of the process in which the court reviews the propriety of dismissal of a putative class action.
In particular, we do not believe that the Committee should suggest that a bought-off plaintiff is an "unwilling" champion of the class's interests. (p. 16). After all, that plaintiff filed a class complaint in which he or she promised to represent the interests of the absentees. That plaintiff should not be allowed to do an about-face for personal gain, leveraged only by his or her class allegations.
Rule 23(e)(1)(B). This provision requires notice "in a reasonable manner" to those who would be bound by a settlement, compromise, or voluntary dismissal. By omitting the term "withdrawal," the Committee implies that withdrawal is something different from a voluntary dismissal, but as indicated above, the difference is not clear. If the notion is that withdrawals, by definition, do not have preclusive effect, then the Committee ought to say so explicitly.
In any event, we do not believe that the proposal properly draws the line between notice and no-notice. It is difficult to imagine a situation in which a court's approval of a voluntary dismissal of all class claims could lawfully have preclusive effect on the absentees. Assuming no preclusive effect, notice would not be necessary if the absentees had not been previously apprised of the action and there was no other reason to believe that they knew of the case. In that situation, there is no reason to think that the class members are relying on the class representatives to protect their interests. On the other hand, there are situations where notice should be required even where the court's dismissal does not have preclusive effect. Where the class (or a segment of it) previously had been notified of the case or otherwise knew of it, class members have reason to believe that their interests are being represented. Without notice, the statute of limitations could run before the absentees knew that their claims were no longer being advanced by others. In such a case, notice should generally be required given the expectations generated by the class representatives and their lawyers.
Proposed Rule 23(e)(1)(B) implicitly raises a major issue concerning notice in conjunction with settlement. Under the draft proposal, Rule 23(e) notice must merely be "reasonable" and not the "best practicable" as required under current Rule 23(c)(2) (and proposed Rule 23(c)(2)(A)(iii)). In (b)(3) cases in which settlement and certification are simultaneous, there is no concern, of course, because "best practical"/individual notice is the standard. However, in (b)(3) cases where notice has occurred previously, and in all (b)(1) and (b)(2) cases, the "best practicable" notice will often be constitutionally required at the settlement stage regardless of the type of notice that took place at the certification stage. Because settlement is the point at which the absentees' rights are extinguished, that often will be the point where notice to the class is most valuable. At certification, the claims are often undeveloped and notice can only present the case in the most abstract terms. That is not the situation at the settlement stage, where the class member is presented with a more complete description of the claims and defenses and is told the terms of the settlement in detail so that he or she can decide whether to accept the relief, object, or (if proposed Rule 23(e)(3) is adopted) opt out in (b)(3) cases.
Moreover, in many cases, the Rule 23(e) notice is the means used to "register" the class members and/or receive class members' "claims" and thus actually furnish them the relief that the settlement provides. Where that is true, due process requires the best notice practicable, since to do otherwise would effectively extinguish not only the class members' right to bring their own suit (through a preclusive judgment) but their property rights without compensation. See, e.g., In re Orthopedic Bone Screw Prods. Liab. Litig. (Sambolin), 246 F.3d 315, 326-27 & n.11 (3d Cir. 2001); see also Mullane v. Central Hanover Bank & Trust, 339 U.S. 306, 314-15 (1950). For these reasons, it makes no difference whether the class is one certified under Rule 23(b)(3) or under the mandatory provisions of the Rule. In all cases, if the Rule 23(e) notice is the means by which the class members learn of the availability of relief and/or claim that relief, notice must be the "best practicable," which typically means individual notice.
Thus, we urge the Committee to amend proposed Rule 23(e)(1)(B) to state that when the settlement notice would effectively distinguish the substantial property interests of the absentees, the notice requirements of proposed Rule 23(c)(2)(A)(iii) apply. Proponents of the current proposal may argue that "reasonable manner" notice provides sufficient flexibility to protect the absentees' due process rights at the time of settlement. Not so. "Reasonable manner" is different from "best practicable" and is understood in the class action world to be a less rigorous standard that generally does not require individual notice. Again, when substantial property interests are at stake, the "best practicable" notice, in which individual notice is the benchmark, is necessary to protect absentees' due process rights.
Rule 23(e)(1)(C). This provision codifies existing practice by requiring a hearing and a fairness finding before a settlement is approved. As such, it serves as a reminder for the federal courts and a model for state courts, many of which have rules based on Rule 23 and often follow federal class action practice and case law.
The Committee Note's list of factors for consideration in settlement proceedings will be useful to courts, particularly those that do not often consider class action settlements. Two of the listed factors should be clarified. Factor (H) (p. 20) refers to "claims by other classes and subclasses." Presumably, its reference to "other ... subclasses" is to subclasses within the class subject to the settlement, but the Note is not clear on that point. More importantly, what does the Committee mean by "other classes"? Does it mean other classes bringing claims in other cases? Is the Committee therefore suggesting that the court should look to the existence or strength of similar class actions pending before other judges in deciding whether to approve the settlement before it? Similarly, clarification is needed on factor (I) (p. 20) concerning the "results achieved ... for other claimants." Presumably, under this factor, the court should consider cases or side-deals involving claimants with similar claims brought outside the class, but the Note does not say so. If that is what the Committee intends, the Note should add the words "outside the class possessing the same or similar claims" after "for other claimants."
We suggest one other addition to proposed Rule 23(e)(1)(C). As noted, the Rule requires the court to make a fairness finding, but it does not say anything about the kind of support that must accompanying the finding. However, the Committee Note says that "[t]he court, further, must make findings that support the conclusion that the settlement meets this standard. The findings must be set out in detail to explain to class members and the appellate court the factors that bear on applying the standard[.]" (p. 17) (emphasis added). That obligation should be set forth in the text of the Rule itself. In particular, the first above-quoted sentence is Rule-like; it says that the court "must" make findings, in essence applying Rule 52(a) to Rule 23(e) determinations. At the least, that sentence should be lifted out of the Note and put into the Rule. In addition, the Committee should consider explicitly referring to Rule 52(a), as it has done with respect to fee determinations under proposed Rule 23(h)(3). Otherwise, courts may interpret the requirement to make findings less rigorous under Rule 23(e) than under Rule 23(h), which we doubt the Committee intends.
Rule 23(e)(2). We agree with the thrust of this provision concerning the disclosure of side-agreements, but believe it should be mandatory. Some side-agreements will be immaterial to the fairness determination, but how would the court know if the agreements are not disclosed? In Amchem Products, Inc. v. Windsor, 521 U.S. 591 (1997), and Ortiz v. Fibreboard Corp., 527 U.S. 815 (1999), for instance, the propriety of side-settlements outside the class were hotly debated (indeed, in Ortiz, relevant to the Supreme Court's ruling, see id. at 854-55), but under the Rule as currently proposed they need not have been disclosed to the court or the absent class members. Based on our experience representing objectors, there is no way to know which settlements may be masking relevant side-agreements unless the parties disclose them.
In the Amchem case, for instance, it was not until after the settlement was rejected that the settling parties disclosed that the defendants had agreed as part of the class settlement to pay what turned out to be millions of dollars of class counsel's costs in litigating the fairness of the settlement, even in the event that the settlement was not approved. See Brief of Appellants White Lung Ass'n of New Jersey, et al. in Georgine v. Amchem Prods., Inc., No. 97-1608 (3d Cir.), available at http://www.citizen.org/litigation/briefs/class_action/articles.cfm?ID=6648. This agreement -- which we viewed as collusive -- was not disclosed to the objectors (or, to our knowledge, to the court) during the fairness proceedings. A mandatory version of proposed Rule 23(e)(2) would have brought this side-deal to light. Moreover, there is no countervailing benefit to non-disclosure. The only downside, if it can be called that, is that some disclosures may prove irrelevant.
The question of to whom side-deals must be disclosed presents a different question. The proposed Rule says that the court may require that the parties "file" a copy or summary of any side-agreement. Thus, in the ordinary situation, the material would be public and therefore available to the class members, as it should be. Moreover, documents that are filed with the court must be served upon the parties or their counsel. Thus, the Rule should provide, or at the least the Committee Note should reiterate, that such filings be served on all parties or their counsel, including all known objectors.
We disagree with the Rule's view that, in some cases, only a summary of the side-agreement need be filed because the full agreement may involve work-product or "related interests." (p. 22). A summary is inadequate because the court and the absentees must be able to assess for themselves what the side-agreement says and how it relates to the fairness of the overall class settlement; they should not be required to view the side-agreement only after it is condensed by the very parties who entered into it. In any event, we doubt that most, if any, side-agreements contain work product. Even where they do, they should be disclosed in full to the court, with the publicly-filed versions purged of work-product.
The Committee Note raises the possibility that the court "should consider the need for some measure of confidentiality" in dealing with the disclosure of side-agreements. (p. 22). Certainly, confidentiality should never be granted for side-deals involving payments to similarly-situated plaintiffs (as in Amchem and Ortiz), "incentive" payments for named plaintiffs, and other arrangements that, to quote the Committee Note, "may have influenced the terms of the settlement by trading away possible advantages for the class in return for advantages for others." (p. 22). In limited circumstances, confidentiality is appropriate. The example provided by the Committee -- conditioning the class action settlement on a limit in the number or value of opt-outs -- may justify secrecy because of the fear that "third parties will solicit class members to opt out." (p. 22). But even there, as the Committee acknowledges, only the threshold numbers and not the existence of the agreement itself would be entitled to protection. In any event, full disclosure should be made as soon as the opt-out period ends, and the Committee Note should be amended to make that clear. The point here is that full disclosure should be the rule, with any secrecy as limited and short-lived as possible.
Rule 23(e)(3). We agree strongly with the Committee that opt-out rights should be accorded to class members at the time of settlement because much more valuable information is available to class members at that stage than at the certification stage. At certification, the notice is necessarily abstract, with only the plaintiffs' allegations, and perhaps the expected defenses, set forth in general terms. Often, little or no merits discovery has taken place and the class members can be told only that the case has been filed and how the class is defined. For this reason, we support alternative #1, in which opt-out rights presumptively will be accorded at the settlement stage.
At the October 2001 meeting held by the Committee at the University of Chicago Law School, some participants expressed opposition to this proposal (particularly alternative #1), principally on the ground that requiring comprehensive notice and opt-out rights at the settlement stage would be unduly costly to the settling parties and thus would ultimately undermine class members' ability to settle on favorable terms. Attorneys who represent clients in small-claims securities and antitrust cases were particularly concerned.
Those concerns are misplaced for two reasons. First, Rule 23(e) requires notice in any event, so the cost of notice must be borne at the settlement stage regardless of whether opt-out rights are also accorded. Moreover, as noted above in our discussion of Rule 23(e)(1)(B), in cases where the class must be notified of the availability of substantial relief, the "best practical notice" is required even where notice was provided earlier at the certification stage. Second, even assuming that the cost of notice is a legitimate concern (as in many small-claims cases), the criticism of the proposed opt-out provision misses the mark. The problem addressed by proposed Rule 23(e)(3) is not whether such notice and opt-out rights should be accorded, but when they should be accorded. Rule 23 currently requires notice at both certification (in (b)(3) cases) and at settlement (in all cases). That being the case, there surely should be opt-out rights at settlement, where, as noted earlier, those rights can be exercised more intelligently than at the certification stage. Whether the rule in Eisen v. Carlisle & Jacquelin, 417 U.S. 156 (1974) -- mandating comprehensive certification notice at any cost in all (b)(3) cases -- should be revisited is a different question for another day.
Rule 23(e)(4)(A). We support this Rule, which states that any class member may object to any settlement or dismissal requiring court approval under Rule 23(e)(1)(C). We have some concerns, however, about omissions from the Rule and statements in the Note.
First, the Rule itself should contain procedures for the presentation of the settlement by the settling parties and the presentation of objections by class members. The role played by objectors does indeed "justify substantial procedural support." (p. 65). The problem, with all respect, is that the proposed Rule does not provide that support. Current practice is wholly unregulated by the Rule. Thus, in most cases, the settling parties submit the settlement for preliminary approval without any notice to interested parties, along with a bare-bones joint memorandum requesting approval and little or no evidentiary submissions in support. The class members are provided notice and given what is often as little as a few weeks to respond. They then must struggle to get rudimentary information from the settling parties, such as the settlement agreement itself, supporting memoranda, case pleadings, and supporting evidence, if any. Often class counsel refuses to provide much if any information on a timely basis. Then, after the objectors file their objections, the settling parties file, for the first time, substantive responses that provide a more detailed justification for the settlement and (often) evidentiary support in the form of declarations, documents, and the like, leaving objectors scrambling to respond just days before the fairness hearing. The game is "hide the ball." This problem and potential solutions are set forth in detail in Wolfman & Morrison, Representing the Unrepresented in Class Actions Seeking Monetary Relief, 70 N.Y.U. Law Rev. 439, 480-90 (1996).
At a minimum, the Rule should require the settling parties to file their full memorandum in support of the settlement agreement with evidentiary support at the time of preliminary approval or in any event 45 days prior to the date class members' objections are due. In addition, the objectors should be permitted to take discovery on matters concerning the settlement terms. Although the Committee Note suggests that discovery should be allowed in most circumstances (p. 27), a Rule provision is preferable. The settling parties should have the opportunity to respond by a date at least two weeks prior to the fairness hearing. Although these suggestions may seem minor, they are quite important if the fairness hearing is to be something more than a one-sided presentation.
Second, we disagree with the Note's statement that the need to support objectors may be reduced where there is an opportunity to opt out. (p. 28). Rule 23 treats the right to adequate representation (i.e., the right to stay in the class and be properly represented by the named representatives and their counsel) and the right to opt out in (b)(3) cases as wholly independent of one another. See Eisen v. Carlisle & Jacquelin, 417 U.S. 156, 176 (1974) (the commands of Rule 23 are consecutive, not alternative, and therefore notice and opt-out rights are in addition to, not instead of, adequate representation). Thus, objectors should receive procedural support in challenging the adequacy of their representatives even if opt-out is an option. Moreover, in many class actions where the individual stakes are small, opt-out is not a realistic option, and therefore the Note's comment does not apply. For all of these reasons, we ask the Committee to omit this comment.
Third, the Note mentions that a class member may object in the district court without seeking to intervene. That makes sense because no one should have to become a party in a case in which she is a party who will be bound by the settlement. The Note then goes on to remind objectors to intervene if they wish to preserve the right to appeal, because some circuits require it. (p. 27). To be blunt, that intervention rule makes no sense, and even the Seventh Circuit (whose precedent the Committee cites) has turned the Rule into a mere paperwork requirement: Any timely objector who moves to intervene then has the right to appeal approval of the settlement on its merits. See In Re Synthroid Mktg. Litig., 264 F.3d 712, 715 (7th Cir. 2001); Crawford v. Equifax Payment Services, Inc., 201 F.3d 877, 881 (7th Cir.2000). Thus, the intervention requirement serves only as a trap for the unwary with no countervailing benefit. That is particularly true for pro se objectors who almost always do not know of the requirement.
In April 1995, we wrote the Committee asking that Rule 23 be amended to provide that an objector need not intervene to appeal from approval of a class settlement. That letter, a copy of which is attached as Exhibit A, described cases where the requirement prevented courts of appeals from entertaining serious challenges on the merits. We wrote again in November 2000 (Exhibit B) in support of an amendment that the Advisory Committee was considering that would have provided appellate "standing" to non-intervening class members. Unfortunately, that amendment did not make its way into the current proposal. At this juncture, however, the Committee should defer acting because the Supreme Court has taken up the intervention issue in Devlin v. Scardelletti, No. 01-417 (U.S.), which will be argued in March 2002. If the Court holds that intervention is not required, the Committee Note need not mention the issue at all. On the other hand, if the Court holds that intervention is required, we urge the Committee to promulgate a rule disposing of that requirement for the reasons set out in Exhibits A and B.
Finally, we are dismayed about the way in which the Committee Note discusses the use of objections to exert improper influence in class action settlements. To be sure, some objectors do wield improper strategic power because of their ability to "hold up" settlements unless they (meaning objectors and their lawyers) are paid to drop their objections. However, that problem can be dealt with by assuring that all deals with objectors are fully disclosed and approved by the court. If objectors' side-deals are subject to mandatory court scrutiny, they will, in our judgment, rarely be approved. In any event, whether such side-deals are approved or disapproved, the problem would be eliminated (since the objector would lose all improper leverage), without disarming or threatening objectors who raise genuine concerns and do not seek a buy-out. In this regard, the proper approach is proposed Rule 23(e)(4)(B), which, as discussed in the next section below, should be strengthened to achieve its stated purpose. In addition, we agree that objectors should not be rewarded with fees for making merely cosmetic changes in a settlement. (p. 29).
Nonetheless, we are concerned about two passages in the Committee Note that may discourage objector participation. First, the Note appears to give credence to complaints voiced by "class action practitioners" about the existence of illegitimate "professional objectors" whose interest is personal gain, not improvement of class action settlements. With all respect, this suggestion is unfounded. As noted above, objections can be used for improper purposes and there are ways to deal with the problem. However, we know of only one private practitioner in the entire country who makes his living representing objectors (and he has presented meritorious objections in many cases). Moreover, there is nothing wrong with a lawyer making a living representing objectors; it is a positive good that absentees have lawyers to turn to when they believe they are aggrieved by an unfair or unlawful settlement, just as it is a positive good that there are many class action practitioners available to those who are harmed by illegal conduct. Thus, we urge the Committee to delete this reference.
Second, we are confounded by the Committee's admonition that objectors are subject to Rule 11 and that courts "should not hesitate to invoke Rule 11 " against objectors "in appropriate cases." (p. 29). Why is this sentence in the Note? All litigants and lawyers are subject to Rule 11, so why single out objectors? As noted above, objectors should not be permitted to extort favorable side-deals. Nor should objectors get fees unless they have earned them. Indeed, we wrote to the Committee in 1999 proposing a provision similar to proposed Rule 23(e)(4)(B) to curtail improper conduct by objectors. However, in our experience -- which we believe to be the most wide-ranging objector practice in the country -- there is no basis for suggesting that objectors are particularly prone to Rule 11 violations. To the contrary, we have seen close-to-the-line conduct more often among settling parties and their counsel. Moreover, to the extent that objectors' counsel engage in "extortionate" activities, it takes two to tango, and the settling parties who offer the "bribes" bear a similar responsibility. As the RAND Class Action Study explains in some detail, see Hensler, et al., Class Action Dilemmas 494-97 (RAND 2000), the settlement process can be very difficult for objectors, who have few resources and face an uphill battle against well-financed parties and the challenge of persuading a court that has already given the settlement preliminary approval. See Brief of Amicus Curiae Public Citizen in In re Prudential Ins. Co. of Amer. Sales Practices Litig., No. 99-5960 (3d Cir), available at http://www.citizen.org/litigation/briefs/Class_Action/articles.cfm?ID=693 (detailed discussion of legal and practical difficulties faced by settlement objectors). To single out objectors for a Rule 11 threat makes matters worse. For all of these reasons, we urge the Committee to delete the reference to Rule 11, which could have a chilling effect on potential objectors.
Rule 23(e)(4)(B). We strongly support the concept behind this Rule requiring approval of objector settlements, but believe it must be strengthened to have its desired effect. As noted earlier, we wrote the Committee in 1999 proposing a similar rule. That letter is attached as Exhibit C. The basic component of the Rule should be as the Committee describes it: "An objector who receives a benefit should be treated as withdrawing the objection and may retain the benefit only if the court approves." (p. 29). However, the Rule should make clear that all withdrawals and related agreements must be submitted on the record, so that class members can comment on the approval/disapproval process just as they may comment on the overall settlement itself. That appears to be what the Committee contemplates, but it should be stated explicitly to avoid the secrecy that occurred in Duhaime v. John Hancock Mutual Life Insurance Co., 183 F.3d 1 (1st Cir. 1999) (cited in the Note at p. 30).
Of far more concern is the Committee's statement that there is "little need for further inquiry if the objection and the disposition go only to a protest that the individual treatment afforded the objector under the proposed settlement is unfair because of factors that distinguish the objector from other class members." (p. 29; see also p. 30). This statement suggests that objectors often may be able to show that their situation justifies disparate treatment. The Committee should make explicit that such a showing will be very rare. Otherwise, the very extortion that proposed Rule 23(e)(4)(B) seeks to eliminate may flourish. Class settlements are meant to treat similarly-situated class members alike. In cases where all members of the class are not similarly situated, the differences among the class members ought to be resolved fairly by the settlement itself (such as in an ADR or claims process). Moreover, in (b)(3) cases, the right to opt out should provide the necessary safety valve for members who perceive themselves as dissimilarly situated from the rest of the class. And, if the settlement does in fact treat segments of the class unfairly, the objector should pursue his or her objections on behalf of the disadvantaged absentees, instead of using the objections for purely personal gain.
Finally, with all respect, the failure of proposed Rule 23(e)(4)(B) to apply to appellate proceedings is a serious error, which could render it nearly meaningless. Objectors intent on being bought-off, and settling parties willing to participate in such a deal, are usually very sophisticated. If the Rule applies only in the district court, then the objector will simply take an appeal and exert improper leverage while the case is on appeal. Ironically, the very case that the Committee points to (correctly) as illustrating the problem, Duhaime (p. 30), would not have been affected if the proposed Rule were in effect, since the buy-off there took place while the case was on appeal. The Committee suggests that a court of appeals could look into a settlement with an objector, but that is not accurate. There is no rule requiring disclosure of class action side-deals to a court of appeals, and, therefore, once on appeal the case would simply "settle" pursuant to FRAP 42(b), never to be heard of again (which is exactly what the settling parties attempted to achieve in Duhaime). Moreover, the Committee's suggestion that the matter could be resolved in a court of appeal's mediation procedure only illustrates the problem with the proposed Rule. Appellate mediators would have no duty and indeed no power to reject any settlement with an objector (appellate mediation is, in fact, confidential and not disclosed to the court). And, as noted above, upon settlement, the case would simply be dismissed under FRAP 42(b). Thus, we urge the Committee to amend the proposal to state that all settlements with objectors must be brought back before the district court for approval, as follows: "Any such withdrawal 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."
As noted above, some of the proposed Rule 23 changes codify best practices, while at the same time making significant modifications and additions to alleviate problems that have arisen in practice. Proposed Rule 23(g) is different. Particularly with respect to proposed Rule 23(g)(1), the Rule restates nearly-universal practice without any significant modification. Subsection (g)(2)(A), discussed below, does go beyond current practice, but we believe it to be ill-advised in its current form. Subsection (g)(2)(B), which requires the court to consider certain factors in appointing counsel, would not alter current practice very much. The real meat of the Rule is in the Committee Note, so much so that the Committee may want to ask whether it wishes to promulgate a new Rule principally to inform the litigants and the courts of the views set out in the Note. We believe that some of the topics addressed in the Note are worthy of incorporation into the Rule. However, in our view, if the Committee is not inclined to incorporate the more significant provisions of the Note into the Rule, then no Rule is preferable.
Having said that, we set forth our views on the proposed Rule and Note, assuming that a new Rule 23(g) of some sort is promulgated.
Rule 23(g)(1)(A)&(B). Proposed Rule 23(b)(1)(A) sets out the well-established principle that the court must appoint class counsel unless a statute provides otherwise. This point is well illustrated by the Note's discussion of whether, in securities fraud cases, the PSLRA's attorney selection requirements conflict with common-law methods of attorney appointment. Since the PSLRA question is one of statutory interpretation, the Rule takes no position on that topic. The Note states that subpart (g)(1)(A) "does not purport to supercede or affect the interpretation of those [PSLRA] provisions" (p. 34), and it couldn't do so since a Rule may not supercede or otherwise affect a federal statute. Thus, we question the need for Rule 23(g)(1)(A).
The Note, however, addresses an important issue when it says that "class counsel must be appointed for ... each subclass if the court certifies subclasses." If there is to be a Rule 23(g)(1)(A), the requirement of separate counsel for each sub-class ought to be in the Rule itself. Unfortunately, courts do not regularly appoint separate sub-class counsel, and, when they do, they do not insist that each counsel be truly independent of each other (i.e., not drawn from the same consortium of lawyers who filed the case or negotiated the overall settlement), even though that is plainly required by the Supreme Court's decisions in Amchem Prods., Inc. v. Windsor, 521 U.S. 591, 625-57 (1997), and Ortiz v. Fibreboard Corp., 527 U.S. 815, 856 (1999).
Subsection (g)(1)(B) repeats an unchallenged, deeply entrenched view that class counsel must adequately represent the class. Almost every class certification decision states that there are two components to "adequacy" under Rule 23(a)(4), one as to the class representatives and the other as to the class lawyers. Indeed, the courts recognize that in many cases, particularly small-claims cases that are necessarily lawyer-driven, the question of lawyer adequacy is the more important of the two inquiries. Thus, in our view, the provision as drafted is unnecessary. Once again, the key point is in the Note, which explains that counsel's duties run to the class as a whole, not to the class representatives. In particular, the Committee's observation that the class representative cannot be given power to approve or disapprove a settlement should be in the Rule, as well as, perhaps, the notion that only the court, not the named plaintiffs, can appoint and "fire" class counsel.
Rule 23(g)(2)(A). This proposal adds something new by strongly suggesting that the courts should be more active than they are at present in encouraging bidding for the position of class counsel, whether through a formal "auction" process or simply by encouraging lawyers who did not file the complaint to file motions seeking appointment. This provision is problematic as written. In the first place, it is too vague. It says only that the court should provide a reasonable time after the case is filed to allow lawyers to seek appointment as class counsel. It does not say explicitly whether courts should conduct an auction; it does not say whether the competing lawyers must have class members as clients; and it does not say what happens to the lawyers who filed the case if they are "displaced." The latter point is quite important because, without further guidance, the courts could be empowered simply to "dump" the lawyers who did all the pre-filing research and investigation (possibly involving lots of time and out of pocket expense) in favor of "free riding" lawyers promising to charge less for litigating the case.
Thus, if the Rule is promulgated it should provide that after a settlement or plaintiff-favorable judgment, the initiating lawyer will be compensated for his or her investment in the case, even if another lawyer is appointed class counsel. Without that assurance, the field will be dominated by the well-financed repeat players because small law firms and solo practitioners cannot afford to take the risk that the proposed Rule would otherwise impose. Allowing dominance by these repeat players will undermine a broad market in legal services and harm the interests of class members.
Two other aspects of subsection (g)(2)(A) are of concern. The Rule says that the court "may" allow a "reasonable period after the commencement of the action" in which to entertain applications for class counsel. The Note says that ordinarily the court "should" allow a reasonable time period to entertain applications for appointment (p. 38), which is odd because what the Rule states as wholly discretionary, the Note describes as generally mandatory. Of more concern is the Note's only stated exception to the general rule that the court should entertain competing applications for appointment: settlement class actions, such as in Amchem and Ortiz, where the case is settled prior to the filing of the complaint. Assuming that competition for appointment as class counsel makes sense at all, in our view, the Committee has the presumption precisely backwards. If there were ever a situation in which the court would want to entertain applications from other counsel claiming that they can handle the case more fairly and efficiently it would be a case where the settlement preceded the filing of the complaint. In that situation, there has been no formal discovery; the defendant may have approached plaintiffs' counsel with the deal, suggesting possible collusion; and the initial plaintiffs' counsel may have done little or no analysis of the strength of the case, which, after all, they never intended to litigate. If nothing else, we urge the Committee to eliminate any exception for class actions that are settled before they are filed.
As to the implication that auctions may be advisable, the proposed Rule is too open-ended and premature. It is too open-ended because auctions make sense only in the relatively few cases where liability and a good approximation of class-wide damages are known at the beginning of the case. Otherwise, the lawyers will have no idea what they are bidding on and an auction is unlikely to attract many qualified bidders or result in savings for the class over the traditional retrospective fee determination. See generally Testimony of Brian Wolfman, Third Circuit Task Force on the Appointment of Class Counsel (June 2001), available at http://www.citizen.org/litigation/briefs/Class_Action/articles.cfm?ID=5808. Moreover, because a Task Force appointed by the Third Circuit is now studying the auction concept in detail, the Committee should consider the Third Circuit's final report before it promulgates a Rule on whether and how the court should entertain applications from competing counsel. That is especially true because the Task Force's draft report was generally quite skeptical of the use of competitive bidding for appointing class counsel. See http://www.ca3.uscourts.gov/classcounsel/final%20report%20of%20third%20c....
Rule 23(g)(2)(B). This proposal sets out the factors that a court must consider in entertaining counsel's motion for appointment. The factors listed in the proposed Rule are those most frequently discussed in a motion for class certification, which is usually the pleading in which counsel asks to be appointed to represent the class. The second two factors listed in the proposed Rule -- the work done by counsel to investigate the claims, and the resources to be committed to the case -- are not always stressed by counsel or explicitly considered by the court, and thus they are useful additions to the Rule.
However, one important factor discussed only in the Note belongs in the Rule. The Note says that the court may consider any agreements that counsel has made concerning attorney's fees and nontaxable costs. (p. 39). We assume that this statement is a reference to fee-sharing agreements among counsel, agreements concerning advancement of costs by certain counsel, and the like. Knowledge of such agreements is critical to an understanding of whether the class will be adequately represented. For instance, the court must ask whether a fee-sharing agreement among counsel is fair or, rather, whether its principal purpose is to pay potentially competing lawyers to stay in the fold and thus will bloat the fee application to the detriment of the class.
The courts are currently split on the question whether fee-sharing arrangements must be disclosed in all cases. Compare In re Agent Orange Prod. Liab. Litig., 818 F.2d 216, 225 (2d Cir. 1987) (disclosure required), with Bowling v. Pfizer, Inc., 102 F.3d 777, 780-81 & n.3 (6th Cir. 1996) (disclosure not warranted in all cases, but noting that fee-sharing agreements "certainly raise questions at the settlement approval stage" because of "the risk that counsel has in some way been 'bought off'") . We urge the Committee to adopt the pro-disclosure position in the Rule. That position will protect class members in many cases, and there is no benefit to non-disclosure.
We agree with the Committee that there may be reason to keep fee agreements confidential early in the litigation because information as to how the litigation will be financed could be put to improper use by the defendant. However, at some point, and certainly at the time of settlement (or litigated judgment), that information must be made public, particularly so that the class members can evaluate fully the adequacy of their lawyers and the fairness of the fee request.
Although proposed Rule 23(h), like Rule 23(g), largely codifies current practice, we believe that it will benefit class members and urge its adoption with certain modifications discussed below. The Rule's introductory paragraph basically restates the law (that a class action court may award a fee when the law permits it to do so). However, we ask the Committee to delete the phrase "or by agreement of the parties," as both unnecessary and potentially misleading. One of the exceptions to the American Rule providing that the parties bear their own costs is when the parties agree otherwise, so the phrase is, at best, redundant. However, because the Rule lists the "agreement of the parties" as a separate basis for a fee award, courts may well infer (incorrectly) that this basis for a fee award may be entitled to special deference or may be reason enough to award a fee in the amount agreed to by the settling parties.
Our concern is based on experience representing objectors challenging fee requests. Class counsel have argued that where there is a fee agreement with the defendant, there is no basis for court scrutiny of the fee request, going so far in some cases as to argue that absentees lack "standing" to challenge such awards. Courts have properly rejected such arguments, see, e.g., In re General Motors Corp. Pick-up Truck Fuel Tank Litig., 55 F.3d 768, 820 (3d Cir. 1995), but they continue to persist.
The Note says that all fee requests are subject to court scrutiny (p. 47, citing General Motors, 55 F.3d at 819), but later suggests that certain "weight" might be given to a defendant's agreement not to challenge class counsel's fee request up to a certain amount (pp. 50-51), see Weinberger v. Great N. Nekoosa Corp., 925 F.2d 518 (1st Cir. 1991), or that deference might be given to fee agreements between individual class members and class counsel.
Because the defendant generally is indifferent to how the fee and class relief are divided (and is concerned only with the overall bottom line), see Prandini v. National Tea Co., 557 F.2d 1015, 1020 (3d Cir. 1977), no "weight" should be accorded a defendant's acquiescence in plaintiffs' counsel's fee request from a common fund. And, aside from the PSLRA, where Congress has determined that a big-stakes plaintiff may negotiate a good fee deal for the class, counsel's retainer agreement with the named plaintiff will almost always be irrelevant. For instance, in the typical consumer class action, sometimes involving no more than a hundred dollars per class member, see, e.g., Phillips Petroleum Co. v. Shutts, 472 U.S. 797, 801 (1985), there is no basis for deferring to the one-third contingent fee contained in the retainer between the named plaintiff and the class lawyer. Even in a mass-tort class action, where the individual claim may have considerable value, there is, again, no reason to defer to a standard contingency contract, which does not take into account the economies of scale in class litigation.
For all of these reasons, the Committee should delete any reference to fees by agreement and amend the Note to state that, except as required by statute, the court's fee determination must be wholly independent, uninfluenced by fee agreements with the defendant or the named plaintiffs.
Rule 23(h)(1). We agree with the thrust of this subsection because it explicitly requires that fees be sought by motion and that interested parties be notified of the motion. The reference to Rule 54(d)(2) is a bit curious. Although the Note says that "[c]lass action fee awards have heretofore ... been handled under Rule 54(d)(2)" (p. 44-45), that is generally not the case. In our experience, Rule 54(d)(2) is almost never invoked except in statutory fee-shifting cases. In common-fund actions, the parties generally do not treat Rule 54(d)(2) as the governing fee provision. In any event, as the Committee recognizes (p. 52), Rule 54(d)(2) cannot reasonably apply to class actions in all respects. For instance, the 14-day deadline serves no purpose in the class action context, since the fee application will often be quite complex and must be coordinated with notice to the absentees in many circumstances. Proposed Rule 23(h)(1) recognizes this problem, because it says that the claim for fees must be made "at a time directed by the court." However, to avoid any confusion in cases where the court provides no immediate direction, Rule 23(h)(1) should state explicitly that the time limit in Rule 54(d)(2)(B) does not apply.
In any event, it is unclear why the Committee wants to adopt Rule 54(d)(2) generally; the particular provisions of proposed Rule 23(h) either track Rule 54(d)(2) or, as in the case of proposed Rule 23(h)(4), specifically incorporate one of its provisions. Put differently, the Committee should explain the independent significance, if any, of the Rule 23(h)(1)'s general incorporation of Rule 54(d)(2).
Proposed Rule 23(h)(1) also states that notice of any motion for fees must be served on all parties and that notice of class counsel's fee application must be provided to the class members "in a reasonable manner." The Committee Note indicates that, in the settlement context under Rule 23(e), "ordinarily" notice regarding fees will be combined with notice of the proposed settlement. (p. 53). Such a notice should include, at a minimum, the amount (or the maximum) to be requested, the existence of any fee-sharing arrangements, when the motion will be filed, and how a copy of the fee request may be obtained.
There is an equally important notice component missing from Rule 23(h)(1). All parties, including all absentees who have entered an appearance through counsel or otherwise, should be served with the full fee motion itself, including all supporting documents and affidavits. In our experience, class counsel often resist providing this information to objectors, despite its obvious relevance to objectors' concerns and to the court's need for an adversary presentation regarding fees. Subsection (h)(1) should be amended to include this requirement.
Rule 23(h)(2). This provision states that any class member may object to any motion for fees. It is a positive addition to the Rule because it underscores that all class members have an interest in any fee request, whether made by class counsel or objector's counsel, or whether the fee is nominally "separate" from the relief to be accorded the class in a settlement. See, e.g, In re General Motors Corp. Pick-up Truck Fuel Tank Litig., 55 F.3d 768, 820 (3d Cir. 1995).
The Committee Note to proposed Rule 23(h)(2) raises a few concerns. First, we agree that "ordinarily" objections should be made through a formal court filing rather than through a letter to the court or counsel. (p. 54). However, pro se objectors are generally unfamiliar with legal memoranda and pleadings and therefore usually state their objections in letter form. The Note should state that pro se objections, whether contained in a formal pleading or in some other, less formal format, must be accepted, and that the court or class counsel is responsible for seeing that they are filed. Thus, we ask the Committee to amend the Note to state that "For these purposes, an objector represented by counsel would ordinarily have to file a formal objection with the clerk of court, rather than by letter to counsel or the court. For objectors not represented by counsel, those less formal means will suffice."
Finally, we agree that the need for discovery on fee issues depends largely on how forthcoming fee-seeking counsel have been in disclosing relevant information. Objectors are often stymied from obtaining basic information, such as time and expense records. Moreover, fee-sharing arrangements among counsel, "clear sailing" arrangements with the defendant, agreements for payments to named plaintiffs, and other fee-related agreements should be disclosed in all cases, for the reasons discussed above (see comments regarding proposed Rule 23(g)(2)(B)). If they are not voluntarily disclosed, however, they should be discoverable. Simply put, class counsel's clients ought to know how their lawyers are being paid and whether and in what amount other class members are being compensated.
Rule 23(h)(3). We support this provision regarding a fee hearing and Rule 52(a) findings on fee determinations because it underscores the importance of the fee determination in class actions. Although a hearing need not be held in every case, the court should hold a hearing at least in cases where a fee objection has been filed. Moreover, at this juncture, the Note should stress the importance in the Rule 23(e) settlement context of combining into one hearing the court's consideration of the overall settlement and the fee request. Combining these issues promotes efficiency for the courts and the parties, including objectors. More important, in most cases, the fee determination should not be made separately because it is a critical consideration in the court's overall fairness and adequacy of representation determinations.
Rule 23(h)(4). We oppose this provision concerning reference of fee amount determinations to magistrates and special masters. With the exception of the most mundane issues (assessing the number of hours in a fee application, the adequacy of counsel's task descriptions, the amount of various expenses, etc.), it is important for the judge who handled the case to be fully involved in determining both fee entitlement and fee amount. As noted above, in settlement cases, the proper fee award is inextricably tied to the fairness of the settlement terms, an issue on which a specially-designated magistrate judge or special master would not be expected to have insight but on which the district judge must. Similarly, in cases litigated to judgment, the presiding judge's expertise should be brought to bear on the question of how to cut up the litigation pie.
Comments on Miscellaneous Topics In Committee Note to Rule 23(h). The Committee Note to proposed Rule 23(h), more so than the other Notes, contains a relatively long discussion of the substantive law of class action attorney's fees (pp. 46-52). That discussion is untethered to anything in the proposed Rule, which addresses the procedures by which fee matters should be presented and determined. If the Committee is not inclined to include some or all of these substantive fee observations in the Rule itself, the Committee may want to forego this portion of the Note because, despite its length, it is incomplete and thus potentially misleading. Nevertheless, if the Committee decides to retain this portion of the Note, we have several comments, as follows.
In cases where a class settlement provides monetary relief or relief that can be monetized (such as coupons), a percentage fee award should be tied to the actual relief provided to the class members. If that is the Committee's position, it should be incorporated in the Rule, much as it is codified in the PSLRA. (See p. 48). The Committee recognizes the issue when it says that courts may have to "defer" payment of some of the fee until the results of a settlement's claim procedure are known. We urge the Committee to make the point more forcefully. Why not simply base the fee on the results of the claims procedure? In that case, the lawyer's fate is tied to that of her clients and thus the lawyer has every incentive to see that the clients obtain the settlement relief.
The Committee should also address a related issue. In cases where the scope of the relief is well understood when the settlement is approved, class counsel nevertheless have much work left to assure that the class members are located, the distribution of the settlement proceeds is widespread, and, in cases where the funds are not distributed directly to the class, the money is efficiently spent on other settlement components, such as medical monitoring or research for the potential benefit of the class. See, e.g., Bowling v. Pfizer, Inc., 143 F.R.D. 141, 149 (S.D. Ohio 1992). Similarly, sometimes the settlement proceeds are paid over an extended period of time, even though ultimately paid in cash to the class members. In all such cases, a significant fee should be held back to assure that the settlement is properly implemented by class counsel. For post-approval work, class counsel's efforts cannot be classified as contingent, and therefore courts should generally award such "future fees" on a straight lodestar basis for work as it is performed, with payment forthcoming after the competent completion of the necessary tasks. See Bowling v. Pfizer, Inc., 132 F.3d 1147, 1151 (6th Cir. 1998).
The Committee's discussion of coupon settlements raises particular concern. The Committee says that where there is no secondary market for coupons, a significant "discount" on the fee may be appropriate and that only in "unusual circumstances" would it be proper to base fees on the aggregate value of the coupons' face value. (p. 49). Again, the point should be made more forcefully.
In coupon settlements, the little empirical evidence that exists demonstrates that most class members get nothing because redemption rates are very low. See, e.g., Buchet v. ITT Consumer Financial Corp., 845 F. Supp. 684, 695-96 (D. Minn. 1984) (minuscule coupon redemption rates), amended, 858 F. Supp. 944, 944-45 (D. Minn. 1984) (citing additional information to same effect); "In Camera," 16 Class Action Reports 369, 485-87 nn.2-8 (July-Aug. 1993) (survey of coupon settlements, showing that settling parties generally vastly overstate expected redemption rates and that, without transferability, settlement coupons are generally worthless); B. Meier, "Fistful of Coupons--Millions for Class Action Lawyers, Scrip for Plaintiffs," New York Times, pp. D1, D5 (May 26, 1995) (only one percent redemption rate where coupons could be used toward purchase of new vehicle). Such low rates can result from class member indifference, lack of proper notice, a lack of desire to use the coupon to purchase the defendant's product, or, in cases involving big-ticket items, an inability to afford the defendant's product. In some cases, class counsel have simply multiplied the number of certificates issued by the certificate's face value and sought a "reasonable" percentage of the resulting figure, a position that the Committee recognizes is unreasonable. In other cases, fees have been awarded as a percentage of the plaintiffs' expert's prediction regarding the level of coupon redemption, see, e.g., In re Domestic Air Transp. Antitrust Litig., 148 F.R.D. 297, 322 (N.D. Ga. 1993); see also In re General Motors Corp. Pick-up Truck Fuel Tank Litig., 55 F.3d 768, 807-10 (3d Cir. 1995), predictions that, as noted above, are likely at odds with the little we know about actual coupon redemption in comparable cases.
However, there is no need for guesswork. Why not award the fee based on a percentage of the coupon value that is actually redeemed? Whatever one thinks of coupon settlements -- and there are arguments against their use in any case -- this hold back method will surely eliminate the worst excesses. With the prospect of a paltry fee, no longer would class counsel agree to a settlement in which coupons are non-transferable, Dunk v. Ford Motor Co., 48 Cal. App. 4th 1794, 1805 (1996), or the impediments to redemption so great as to render the coupons valueless to most class members. In re General Motors Corp. Pick-up Truck Fuel Tank Litig., 55 F.3d 768, 808-10 (3d Cir. 1995). In fact, by tying counsel's fate to that of their clients, the typical coupon settlement would become a thing of the past, and only settlements in which the coupon has a cash redemption value or the settlement includes the participation of a secondary market-maker -- in other words, a settlement that actually broadly benefits the class -- would be worth counsel's efforts. See National Ass'n of Consumer Advocates--Standards and Guidelines for Litigating and Settling Consumer Class Actions, 176 F.R.D. 375, 382-84 (1998); General Motors, 55 F.3d at 809.
The Committee is correct that, in cases where the class receives significant injunctive or other non-monetary relief, class counsel are entitled to a full fee, enhanced for the risk of non-recovery. However, in some cases, it may be impossible to value injunctive relief for purposes of assessing a percentage fee. The best solution in those cases is to award a lodestar fee, with a multiplier to account for the risk of non-recovery, a point that the Committee should consider adding on page 49.
Thank you again for the opportunity to present this testimony. If the Committee has any questions, I would be happy to try to answer them.
Submitted on January 15, 2002.