16 November 2018, by Keara M. Gordon, Anthony David Gill
Significant amendments to Federal Rule of Civil Procedure 23 governing class actions are scheduled to become effective on December 1, 2018.
The amendments will: (1) permit notice of class certification or proposed class settlement by e-mail or other electronic means; (2) establish criteria to grant preliminary approval of class settlements; (3) standardize the criteria to grant final approval of class settlements; (4) change the procedure for making and resolving settlement objections to reduce meritless or vexatious objections; and (5) clarify that interlocutory appeals under Rule 23(f) are not available for preliminary settlement approval orders.
As a whole, the amendments both modernize and streamline current procedures, and we believe the amendments will be a positive change.
APPROVAL OF E-MAIL NOTICE; US MAIL NOT REQUIRED
Traditionally, courts required class notice to be provided by US mail, which has been viewed as the most reliable way to ensure individual notice. However, e-mail, text messages, targeted social media, and web advertisements have become many companies' preferred methods of communicating with consumers.
The new amendment to Rule 23(c)(2)(B) recognizes these modern trends, stating that "notice may be by one or more of the following: United States mail, electronic means, or other appropriate means." The rule retains the requirement that a court "direct to class members the best notice that is practicable under the circumstances." While US mail is no longer the presumptive method of notice, it may still be the proper method in certain cases.
This is a positive development. E-mail and text messages, either individually or in combination, is often as (or more) effective and less expensive than US mail for providing notice. Sophisticated counsel and class action administrators are already adept at using modern technologies to reach class members and this amendment should encourage courts to use more cost-effective modern notice methods.
STANDARDIZING PRELIMINARY APPROVAL
Rules 23 requires the court to approve class-wide settlements. The settlement process generally proceeds in three stages: (1) preliminary approval; (2) notice to the class; and (3) a fairness hearing followed by final approval.
Amendments to Rule 23 standardize the preliminary approval process in several ways:
- First, Rule 23(e) – which sets forth the standards for evaluating a class settlement – now makes clear that its requirements apply whether a class has already been certified or the class is being certified for purposes of settlement.
- Second, the Rule previously did not provide a standard for granting preliminary approval. The amendment now specifies that to obtain preliminary approval, parties must provide the court with "sufficient" information to demonstrate that it is "likely" the court will be able to (1) approve the proposed settlement after a final hearing under amended Rule 23(e)(2), and (2) certify the class for purposes of the settlement.
One goal of the new amendment is to emphasize that preliminary settlement approval is not perfunctory. The commentary recommends that parties seeking preliminary approval "should ordinarily provide the court with all available materials they intend to submit" on final approval.
STREAMLINING FINAL APPROVAL
A court can grant final settlement approval under Rule 23 only when it finds a settlement is "fair, reasonable, and adequate" to the class. There is no definitive list of factors courts should consider when evaluating whether a settlement is fair, reasonable, and adequate, and each circuit has developed its own.
The new amendments establishes four "core" issues that any court must evaluate before final approval.
The first two core issues are "procedural," and ask whether:
- the class representatives and class counsel have adequately represented the class; and
- the proposal was negotiated at arm's length.
In particular, the commentary targets the "conduct of the negotiations" as an important focus, including whether a neutral was involved, and states that "particular attention might focus" on the negotiation of attorneys' fees and the terms of any award.
The second two core issues focus on the "substantive elements" of the settlement, and ask whether:
- the relief provided for the class is adequate, taking into account (i) the costs, risks and delay or trial and appeal, (ii) the method of distributing relief to the class and processing claims; (iii) the terms of any proposed award of attorney's fees, including timing of payment; and (iv) any agreement made in connection with the proposal; and
- the proposal treats class members equitably relative to each other.
The commentary makes clear that these core factors are not meant to "displace any factor" a court may choose to consider, but to focus the court's analysis.
LIMITING MERITLESS OBJECTIONS
A frequent and increasingly prevalent concern in settlements has been the rise in meritless objections and so-called "professional objectors." While class members have long had the right to object to a proposed settlement, this new breed of objectors is characterized by individuals who level dubious objections only for their own personal gain, hoping to secure a side-settlement where the objector agrees to withdraw the objection in exchange for a money payment or other consideration. These objectors hope that parties will agree to settle with them, rather than risk delay or denial of the settlement.
The amendments seek to combat this trend and reduce the filing of meritless objections.
- First, they require the objector to state whether the objection affects only the objector or some other segment of the class, and to state the grounds of the objection with "specificity." The failure to provide the required specificity can be a ground for rejecting the objection.
- Second, as the commentary states, "allowing payment [for meritless objections] perpetuates a system that can encourage objections advanced for improper purposes." To combat this problem, the new rule prohibits any "payment or other consideration" to anyone in connection with "forgoing or withdrawing an objection" or "forgoing, dismissing, or abandoning an appeal from a judgment approving the [settlement]," unless the court approves the payment after a hearing. The rule applies regardless of whether the payment is to be made to the objector, the objector's counsel, or a third party.
The amendments do not specify when the court should approve such a payment. Because the amendment's goal is to eliminate meritless objections, withdrawing an objection likely does not suffice. In limited situations where valid objections conferred a substantial benefit to the class, courts have awarded incentive fees to objectors and attorneys' fees to counsel. When or if payments are appropriate for a withdrawn objection will likely be the subject of further judicial development.
The amendments also eliminate the current requirement for court approval to withdraw an objection. Instead, an objector can now withdraw his or her objection at any time so long as he or she is not paid for doing so. This new procedure saves both court and party resources, and works in tandem with the new rule above by allowing for the speedy disposal of meritless objections.
NO RULE 23(F) APPEAL FROM PRELIMINARY APPROVAL ORDERS
Finally, the amendments specify that an interlocutory appeal of a class certification ruling under Rule 23(f) cannot be taken from an order granting or denying preliminary approval of a class settlement. Any request for an appeal under Rule 23(f) must wait for an order granting or denying class certification.
The amendments to Rule 23 should improve the class action settlement process and have the potential to reduce the parties' costs. Greater standardization in settlement procedures should give parties additional guidance regarding how to negotiate settlements that will obtain court approval. We will continue to monitor how courts implement the amended Rule.
Find out more about the implications of the amendments to Rule 23 by contacting either of the authors.