Keys to Class Action Settlements: Understanding the Interests at Stake

Fundamental to the ability to settle a class action is understanding the interests that are being represented by the parties and other stakeholders. Although any given case might present its own unique circumstances, in general the interests can be described as follows.

  1. Named Plaintiffs. The interests of the named plaintiffs are the most obvious and immediate, yet also can be viewed, and often are treated, as the least important. That’s because the named plaintiffs have chosen to serve as representatives of a larger group, and in so doing, have agreed to pursue the greater good rather than simply act in their own self-interest. That they have done so does not mean that they have relinquished their personal interests in the settlement; only that they have assumed a responsibility to look beyond them to support a settlement that is fair to everyone they seek to represent, which by sheer math dilutes their own stakes in the outcome. And because most named plaintiffs do not have the skills or experience to fulfill their representative function on their own, they usually delegate the responsibility to class counsel, thus further diminishing their own participation in the settlement process. For this reason, named plaintiffs most often are not needed at, and do not attend, class action mediations. Rather, their lawyers will drive the negotiations, and will only need to ask their blessing for the outcome they have achieved. (I have had cases where a named plaintiff refuses to give that blessing and becomes an objector to a proposed settlement, but that is a topic for another day.)
  2. Settlement Class Members. On the plaintiffs’ side, the members of the settlement class have the greatest stake in the outcome of the class action and the class action settlement, but because they do not participate directly in either the litigation or the settlement negotiations (and often don’t even know that there is a lawsuit at the time a settlement is being negotiated) the protection of their interests depends on the work and judgment of others. Class members’ interests generally fall into two categories: procedural and substantive, both of which are addressed in federal cases in Rule 23(e). Put simply, class members’ procedural interest is to receive adequate notice and opportunities to opt out of or object to any settlement that they don’t like. Their substantive interest is that any binding resolution of their claims be fair, reasonable, and adequate. Both class counsel and the court are responsible for protecting the class members’ interests in the settlement process. In class mediations and at settlement approval hearings, the settlement class, though silent and unseen, is a powerful force that drives the decisions about both the procedural and substantive terms of settlement.
  3. Class Counsel. All class counsel worth their salt want to achieve good results for their clients. They also have legitimate interests of their own in the class action settlement – namely, the approval and payment of attorneys’ fees and costs. Payment of a reasonable attorneys’ fee to class counsel aligns with the interests of the class, because the fee serves to incentivize counsel to prosecute class members’ claims. Payment of an excessive fee, on the other hand, conflicts with class members’ interests, as any excess funds presumably could have been made available to the settling class. Because of this potential conflict, federal and state rules require judicial approval not only of the fairness of the relief provided to a class in a class action settlement, but also of the amount of fees to be paid to class counsel.
  4. Defendants. Defendants’ interests in class action settlement generally boil down to two things: settling at a reasonable cost and achieving global peace. Determining a reasonable cost depends on a number of factors, including the probable outcomes of the litigation if the case does not settle, the reputational risks associated with either settlement or litigation, the costs of compliance with any injunctive relief that may be awarded or agreed-to, and the likely net cost of implementing the settlement (including, for example, anticipated claims rates in a claims-made settlement). Once a defendant determines how much it is willing to pay to settle, the defendant generally doesn’t care how the funds are allocated as between the named plaintiff, the class, and class counsel, except to the extent that the allocation may affect the likelihood of settlement approval. (The defendant may, however, care about how the relief to the class is allocated among various components of liability if such allocation carries tax implications.) As for global peace, the last thing any defendant wants is to settle one case only to find itself facing another class action raising the same or related claims.¬†¬†Defendants seeking to avoid that risk will focus on two elements of the proposed settlement – the class definition and the release – to make sure the former encompasses the broadest intended class, and that the latter provides as much protection from future lawsuits as a court is likely to approve.
  5. The Court. The primary role of the court is to ensure the fairness, adequacy, and reasonableness of the class action settlement, including the reasonableness of awards of attorneys’ fees and costs, and that the procedural rules and principles of due process are adhered to. Nevertheless, the court also has its own important institutional interests that may come into play, including its interest in managing its docket and in maintaining its reputation for fairness, reasonableness, and impartiality. The courts’ interests are typically not a focus of class action mediations, especially those conducted by private mediators, but they can influence judicial decision-making when the court decides whether to approve a proposed settlement.
  6. The Public. Settlements of some cases may implicate the public interest. For example, if a product defect creates a risk of future harm to the general public, the public may have an interest in the scope and nature of any injunctive relief included in, or omitted from, the settlement. Counsel for both sides should take the public interest into account when negotiating settlements in such cases, and courts should be attuned to any material risks to the public that a class action settlement may likely pose.