Gregory P. Joseph*
Effective December 1, 2003, Federal Rule of Civil Procedure 23, which governs class actions, has been significantly amended. The final amendments incorporated several substantial changes to the original proposals that were circulated for public comment in 2001 (analyzed in Joseph, ‛Action on Class Actions,“ Nat’l L. J., June 24-July 1, 2002).
No Judicial Approval Pre-Certification. One of the most important changes to the original draft amendment lies in the final rule’s dispensing with the requirement of judicial approval of pre-certification dispositions. Amended Rule 23(e)(1)(A) does not require that the court approve any settlement or voluntary dismissal of the claim prior to class certification (the original proposal did require such approval). The Advisory Committee concluded that there is rarely reliance by absent class members on an uncertified class action since, by definition, they have received no notice of the pendency of the action.1 The Committee also observed that it was not clear just what the judge was to do if he or she did not care for the settlement — force the parties to continue litigating?
The final amendment, however, appears to have reversed the law of most circuits. The Committee’s initial proposal codified the majority view that the requirement of Rule 23(e) court approval applied to a pre-certification voluntary dismissal of a putative class action, whether or not a settlement had been reached. See generally 5 Moore’s Federal Practice § 23.81, - (3d ed. 2003). The final version expressly recedes from that view, providing instead that: ‛The court must approve any settlement, voluntary dismissal, or compromise of the claims, issues, or defenses of a certified class“ (emphasis added). The substitution in the text of ‛certified class“ for the former, and ambiguous, ‛class action,“ would appear to overrule the pre-existing case law, under the expressio unius doctrine. The Committee Note articulates this intent: ‛The new rule requires approval only if the claims, issues, or defenses of a certified class are resolved by settlement, voluntary dismissal, or compromise.“
The ability to terminate a class action prior to certification without judicial review raises several issues that the prior requirement of judicial approval obviated.
First, the ability to settle out the individual claims of the named plaintiffs creates the prospect of extortive putative class actions that are never certified — indeed may never be intended to be certified but, rather, are brought in order to be settled.
Second, it incentivizes such extortive behavior when the putative class action cannot be brought by another class member should the pending case be settled (e.g., if the original case is brought on or around the last day of the statute of limitations, which will lapse just after any secret settlement).
Third, it creates significant ethical issues for counsel for the putative class. Precisely what duties, fiduciary or otherwise, does counsel for a putative class assume by commencing a class action? Are these duties enhanced if counsel is formally named interim, pre-certification counsel to the class pursuant to Rule 23(g)(2)(A) (discussed below)? Are those duties breached by settling out the case prior to certification?
Fourth, there are a variety of statute of limitations issues created by the prospect of silent settlement of putative class actions in light of the American Pipe doctrine (discussed in note 1, supra). For example, there is case law in the Southern and Eastern Districts of New York that American Pipe’s tolling of the applicable statutes of limitations for absent class members does not apply to those who file individual actions before a class has been certified, on the theory that they have not really been relying on the class action in any event.2 Should this doctrine be reevaluated in light of the risk that absent class members could now lose their right to sue if they sit on the sidelines and await the Court’s class certification decision, only to learn after the fact that there has been a secret settlement and the statute has run?
Second Opt-Out Opportunity. Potentially the most far-reaching of the amendments is Rule 23(e)(3), which provides that the court may refuse to approve any class action settlement that does not afford a second opt-out opportunity to the members of any class that had been certified before the settlement was reached. The second opt-out is not mandatory but discretionary with the district judge. Amended Rule 23(e)(3) provides that: ‛[T]he court may refuse to approve a settlement, unless it affords a new opportunity to request exclusion to the individual class members who had an earlier opportunity to request exclusion but did not do so“ (adopting the second of the two alternatives that had been circulated for public comment in 2001-02).
The Committee Note underscores that the court may make this decision before it orders notice to issue (under Rule 23(e)(1)(B)) or at the final settlement hearing (under Rule 23(e)(1)(C)), the latter presumably at the urging of objectors. The Note also observes that the judge may address the terms on which class members may elect to be excluded — e.g., providing that they will remain bound by rulings of the court made prior to settlement.
The discretion vested in the court as to whether to require the second opt-out will doubtless spawn a new body of case law as to when a second notice may be inappropriate. There may be occasions — due to the proximity of prior notice or the size of the settlement vis-а-vis the size of the class, for example — when a second notice is not desirable. On the other hand, in many cases, a second notice may be sensible (the parties may prefer a second notice to minimize the number of objectors).
There is also the prospect of a body of case law addressing what undoubtedly will be creative, new types of settlements that the second opt-out provision will spawn. For example, the amount of consideration set forth in a settlement may, by the terms of the settlement, now be reduced on a sliding scale depending on the number of opt-outs. Or the settlement may be conditioned on the absence of a second opt-out opportunity being afforded by the court (caution: some federal judges will perceive this drop-dead approach as an untoward attempt to curb their discretion).
If the parties believe that a second opt-out is not sensible in the circumstances, it is imperative that they address this issue with the court before notice of the settlement hearing is distributed. The question should be thoroughly aired and explored. It would be wasteful and expensive to notice a hearing for a settlement that does not contemplate a second opt-out opportunity, only to have the court order one at the hearing. While judges are always free to change their minds, they are less likely to do so if the issue has been thoughtfully addressed when conditional approval is sought.
Timing of Class Certification. Rule 23(c)(1)(A), as amended, changes the prescribed time for making the class certification motion and decision to ‛an early practicable time,“ from the prior ‛as soon as practicable.“ This recognizes that the motion has seldom been made ‛as soon as practicable,“ unless a very elastic meaning is given to the word ‛practicable.“
The real issue implicit in this amendment is the amount of discovery that the court will permit prior to certification. It is clearly envisioned that some discovery is appropriate. The quantum will depend on the facts of the case, but is also likely to be greater in jurisdictions, like the Seventh Circuit, which tend to focus more heavily on the merits in making the class determination.
‛Conditional“ Certification. The amendment to Rule 23(c)(1)(C) deletes the word ‛conditional“ but simultaneously makes it clear that a certification order may be altered or amended until ‛final judgment“ — as opposed to the prior ‛decision on the merits.“ The deletion of the word ‛conditional“ is purely technical, although the Note stresses that it is intended to convey that, if the court is uncertain as to whether to certify, it ought to delay or deny certification.
Under the amended rule, the certification order is subject to revision even after determination of liability until ‛final judgment“ (the rule formerly permitted alteration or amendment only until ‛the decision on the merits“). Consequently, if damages remain undecided, the class certification order is not set in stone. The Committee Note observes that a determination of liability may show the need to amend the definition of the class, or even decertify.
No Mandatory Notice of (b)(1) or (b)(2) Classes. As initially proposed, Rule 23(c)(2)(A) would have required notification to class members that a (b)(1) and (b)(2) class had been certified. As finally amended, Rule 23(c)(2)(A) provides only that the court ‛may“ direct appropriate notice to the members of any class certified under Rule 23(b)(1) or (b)(2). The Committee Note urges courts to exercise this discretion ‛with care,“ noting that there is no right to opt out of a (b)(1) or (b)(2) class, and that the cost of providing notice ‛could easily cripple actions that do not seek damages,“ thus potentially deterring meritorious actions.
Content of Notice. Amended Rule 23(c)(2) requires that class notices be written ‛in plain, easily understood language“ (easier commanded than mastered) and sets forth, in six bullet points, the mandatory content of the notice (nature of action; definition of class; class claims, issues or defenses; right to enter an appearance through counsel; right to opt out; binding effect of judgment on class). Note that the Federal Judicial Center has created forms of plain-language class notices that are available at http://www.fjc.gov (click on Class Action Notices Page).
Side Agreements. As originally proposed, Rule 23(e)(2) provided that the court could (‛may“) direct the parties to file a copy or summary of any side agreement relating to the settlement. The final amendment instead requires the parties to ‛file a statement identifying any agreement made in connection with the proposed settlement, voluntary dismissal, or compromise.“ The Committee Note observes that the judge may order production of a copy or summary of the described side agreement, so the deletion of the former requirement is not intended to be preclusive by inference.
Appointment of Class Counsel. Rule 23(g) governs selection of class counsel, setting forth explicitly for the first time a fair-and-adequate representation test in subd. (g)(1)(B). Subdivision (g)(1)(C) sets forth a non-exhaustive list of criteria that the court must consider in appointing class counsel, and authorizes the judge to address the issue of fees up front.
Rule 23(g)(2)(A) authorizes the appointment of interim, pre-certification counsel. It would be wise for counsel to apply promptly for that position in cases in which the lead counsel position is not contested because class certification may occur months or years after the litigation has begun, and the failure to have secured the appointment may have a later impact on fees. Assumption of that role, however, may enhance ethical obligations to absent class members, particularly in the event of pre-certification settlement offer.
Rule 23(g)(2)(B) mandates that the court must determine whether even a sole applicant for the lead counsel position satisfies the criteria of the rule, and dictates that, if there is a contest for the lead counsel slot, ‛the court must appoint the applicant best able to represent the interests of the class.“ (The Committee Note clarifies that ‛the applicant“ may be a joint venture of multiple firms or lawyers, and is not restricted to just one.)
Query whether Rule 23(g)(2)(B) has any impact on the use of auctions, since ‛best able“ is subject to a number of interpretations. The original proposal contained other language that seemed auction friendly, authorizing the court, for example, to ‛allow a reasonable period ... for attorneys seeking appointment of class counsel to apply,“ and contemplating that the order of appointment ‛may include provisions about the award of attorney fees or nontaxable costs.“ While all of this language has been deleted, there is nothing in the text of the rule that precludes such an approach — nor does anything preclude an argument that the deletion of the language has consequences.
Attorneys’ Fees. New Rule 23(h) sets forth both procedures and criteria for the court to apply in addressing the award of fees to class counsel. The proposal authorizes an award of ‛reasonable attorneys fees and nontaxable costs authorized by ... agreement of the parties,“ provided that the procedures of the rule are followed and its criteria satisfied. Rule 23(h)(3) does not require that the court hold a hearing on fees (using the permissive ‛may“) but does mandate that it ‛must“ issue findings of fact and conclusions of law in accordance with Rule 52(a). Rule 23(h)(4) authorizes the district judge to refer issues relating to the amount of fees to a magistrate judge or special master.
Objections. New Rule 23(e)(3)-(4) provide that any class member may object to a proposed settlement or dismissal, but that objection may be withdrawn only with court approval. The requirement of court approval is not likely to reduce meaningfully the number of objections, given that a segment of the bar has made a specialty of objections.
New Rule 23(h)(2) permits ‛a class member, or a party from whom payment is sought, may object“ to a motion for attorneys’ fees. There is no requirement of court approval for withdrawal of this type of objection. The reference to ‛a party from whom payment is sought“ presumably is intended to refer to the defendant making the payment to the class. Does it cover a defendant whose payment is fixed but who has agreed to disagree on the plaintiffs’ motion for attorneys’ fees? In that instance, the payment, strictly speaking, is sought from the common fund created by the defendant and not from the defendant itself. Does the rule preclude objections from a non-paying defendant?
* Gregory P. Joseph Law Offices LLC, New York. Fellow, American College of Trial Lawyers. Chair, American Bar Association Section of Litigation (1997-98). Member, U.S. Judicial Conference Advisory Committee on the Federal Rules of Evidence (1993-99). Author, Modern Visual Evidence (Supp. 2003); Sanctions: The Federal Law of Litigation Abuse (3d ed. 2000); Civil RICO: A Definitive Guide (2d ed. 2000). Editorial Board, Moore’s Federal Practice (3d ed.). © 2003 Gregory P. Joseph.
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