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Brian Anderson is a partner in the Washington, D.C., office of O'Melveny & Myers, LLP, and head of the product liability section of the firm's Class Action, Mass Torts, and Aggregated Litigation practice group. He is also an adjunct professor of law at Georgetown University Law Center.Mel Schwing is a counsel in the Washington, D.C., office of O'Melveny & Myers, LLP, who specializes in the defense of corporations in domestic and international class actions and other complex litigation. He also conducts internal corporate investigations and helps presidential appointees through the Senate confirmation process.
The Washington Legal Foundation is a 30-year-old Washington nonprofit public interest group and think tank that advocates free enterprise principles, responsible government, property rights, a strong national security and defense and a balanced civil and criminal justice system.
Many commentators on both sides of the plaintiff/defendant divide have characterized the Class Action Fairness Act of 2005 (CAFA) as an unmitigated boon for corporate defendants. Their view rests on the fact that CAFA confers federal court jurisdiction over most class actions having multi-state implications, which minimizes the ability of pro-plaintiff state courts that had developed into "magnets" for class action filings to exert undue influence over targeted companies and industries.
But CAFA became law in large part due to widespread condemnation of class action settlements that released large numbers of class member claims in exchange for dubiously valuable "coupons" to class members and exorbitant fee awards to plaintiff's lawyers. This combination raised the question: If a class action lawsuit is so weak that plaintiff's lawyers settle it without obtaining significant money for class members, why should they receive a multi-million-dollar fee award?
After studying the question, Congress concluded that many borderline frivolous class actions were being brought on behalf of uninjured consumers in state courts where elected judges prevented defendants from obtaining dismissal of meritless cases. Yet because counsel for both sides recognized the weakness of the case, they agreed to coupon settlements, coupled with substantial fee awards, to end the lawsuit before a trial that posed a risk of embarrassment for plaintiff's counsel, and a risk of a huge judgment for defense counsel. By sending these cases to federal courts under expanded diversity jurisdiction, Congress anticipated that lifetime-tenured federal judges applying well-developed class action law would dismiss the plainly frivolous class actions, focusing their efforts on those actions that more plausibly merited en masse consideration. This in turn would eliminate the need for the lawyers to enter into face-saving/risk-avoiding coupon settlements.
In addition to sending more class actions to federal courts where coupon settlements of dubious cases would not be necessary, Congress also included in CAFA several provisions designed to discourage class action litigants from entering into coupon settlements in the first place. These provisions include a directive requiring explicit court review of coupon settlements; a requirement that attorneys' fee petitions seeking a percentage of a coupon settlement's "benefit to the class" be evaluated based on the coupon's redemption rate, rather than the face value of the coupons multiplied by the number of class members; and a requirement that the attorneys general of all U.S. states and territories be informed of proposed federal court class settlements and be given an opportunity to object to such settlements in protection of the public interest.
The combination of enhanced federal jurisdiction and greater scrutiny of coupon settlements makes CAFA a mixed blessing for class action defendants.
To be sure, it allows them to remove many class actions to federal courts that arguably are better situated to consider the merits of those cases in a dispassionate manner. But it also makes it more difficult for defendants to settle federal court class actions brought on behalf of persons who suffered no real personal or economic injury by providing low-cost coupon benefits to class members that reflect the negligible value of their claims.
This "no-cheap-settlements" prong of CAFA was exercised with great force in the Oct. 11, 2007, decision by U.S. District Court Judge Cecilia M. Altonaga of the Southern District of Florida, which denied approval of a proposed nationwide class settlement in Figueroa v. Sharper Image Corp., No. 05-21251. The case concerned claims that Sharper Image Corp. falsely advertised its Ionic Breeze air purifier as able to clean and purify air when it allegedly does not purify air and instead emits harmful levels of ozone. In rejecting a proposed class action coupon settlement in Figueroa, Judge Altonaga made several rulings that have potentially broad applicability to defendants seeking to settle weak class actions on terms they deem acceptable to them. First, she held that courts in the post-CAFA era are required to scrutinize class settlements in which coupons are the predominant form of relief under a heightened standard to ensure that they are "fair, adequate, and reasonable" compromises reached through arm's-length negotiations. Second, she decided that if the proposed class claims seem factually and legally plausible, a proposed settlement that gives class members little monetary value should be viewed skeptically, and that the settling parties' assertions that the defendant cannot or will not pay more in settlement due to its precarious financial condition should have little weight in assessing the settlement's fairness. Third, she attached great weight to the fact that a large number of state attorneys general repeatedly and forcefully objected to the proposed settlement, invoking to an unprecedented degree their new CAFA-created role as "public advocate objectors."
Judge Altonaga's rejection of the Figueroa settlement was in large part based on its peculiar substance and procedure. The parties had hastily pulled together the initial settlement shortly before an already-certified class action in another court went to trial under circumstances where the Figueroa plaintiff appeared at serious risk of having its lawsuit derailed. Also, the settling parties repeatedly sought to "sweeten" the settlement in various minor ways in response to criticisms. These two factors together tainted this proposed settlement both procedurally and substantively in a way that ultimately led to its rejection.
Conclusion
While CAFA surely benefits class action defendants more than plaintiffs by transferring more cases to federal courts that offer more fairness and predictability in the adjudication of class actions, it is not a "free-pass" for targets of class action lawsuits.
The quid pro quo of giving class action defendants greater access to federal courts is that CAFA expects defendants to vigorously litigate, not settle via coupon settlements, frivolous class actions. The message of Figueroa is that class action defendants in federal court who try to escape all litigation risk by proposing low-value coupon benefits in exchange for global releases of claims (especially where competing lawyers and attorneys general are involved in the controversy) will have a difficult time persuading the federal courts to approve such settlements.
This summary was drawn from the introduction and conclusion of a 19-page analysis. To read the entire report, click here.
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