Thursday, July 19, 2007
I just read two very interesting articles on the problems of class action settlements, each taking a look from a different angle. They make some great points on the role of objectors in class action settlements, and so I wanted to highlight some of their arguments and conclusions.
In federal court, class action settlements require court approval and may be approved only if fair and reasonable. That is because of the dangerous incentive for collusion between a defendant anxious to reduce settlement and a class counsel more interested in fees than class recovery. The court, however, can police only so much. Thus, unnamed class members have an opportunity to object or voice concerns about any prospective settlement; these are called "objectors." Objectors can be important indicators of unfairness or unreasonableness. However, the vast majority of unnamed class members never formally objects. Often, that silence is taken as acquiescence or even support for the argument that the settlement is fair and reasonable.
Christopher Leslie, Professor of Law at Chicago-Kent College of Law, recently published “The Significance of Silence: Collective Action Problems and Class Action Settlements” in Florida Law Review (2007), in which he argues that courts misinterpret the significance of objector silence. He argues that silence is a poor proxy for acceptance because silence may result from ignorance about the settlement terms, insufficient time to voice objections, or even a rational cost-benefit analysis from those who nevertheless have legitimate objections.
Professor Leslie then proposes a two-pronged solution. He first suggests that courts should fashion ways to improve communication among class members and between the court and the class, such as by using the Internet more effectively. For example, courts could require class counsel to create a website for the class action devoted to providing a forum for class member access to documents and forums for discussion and concerns. In addition, courts themselves should accept electronic objections from unnamed class members. He argues that these potential solutions could reduce the cost and ignorance of certain class members to facilitate legitimate objections to settlement. Second, Professor Leslie suggests that courts should view objections more seriously, not only for their own merit but also as “red flags” demanding greater scrutiny of the fairness and reasonableness of the settlement in other ways.
Taking a different vantage point, Professor Edward Brunet, Henry J. Casey Professor of Law at Lewis & Clark Law School, published "Class Action Objectors: Extortionist Free Riders or Fairness Guarantors" in the University of Chicago Legal Forum (2003), in which he argues that enhancing the ability of third parties to voice objections can improve fairness and efficiency. While advocating for more expansion of participation by objectors, Professor Brunet also recognizes that some objectors interested in holding the settlement hostage for a bigger-than-fare share of a limited pie hinder fairness and efficiency. Thus, he argues that an expansion of objector participation should include some screening mechanism to minimize the possibility that objectors will diminish fairness and efficiency. Interestingly, he points out that objectors need not always be class members; they can be public interest groups or state entities intervening on behalf of non-individualized interests. These third parties may provide a more efficient and fair check on class action settlements. Professor Brunet also encourages courts to consider appointing guardian ad litems or judicial adjuncts to represent unnamed class members in a class settlement or otherwise monitor class settlement fairness.
I enjoyed both articles and think they are meaningful contributions to thoughtful debate surrounding class action settlements and the problems they create. They strike me as particularly important after CAFA, which has already caused a substantial increase in diversity class actions heard in federal court under Rule 23.
Monday, July 16, 2007
On Friday, the Third Circuit decided Lafferty v. St. Riel and held that when a case is transferred for improper venue under 28 U.S.C. § 1406(a), the date of filing of the case in the original court—not the date of transfer—is the date of filing for statute of limitations purposes. The court reasoned that a transfer (as opposed to a dismissal) for improper venue does not make the complaint disappear. Instead, a transfer (as opposed to a dismissal) keeps the complaint intact and simply moves the existing lawsuit. Thus, although the statute of limitations of the transferee court generally applies, the filing date is that filed in the transferor court.
The decision puts the Third Circuit in some conflict with Eighth Circuit (which applies the statute of limitations of the transferor court) and in direct conflict with the Fourth, Seventh, and Eleventh Circuits (which all apply the transferee court's statute of limitations but use the date of transfer as the filing date for compliance with that statute of limitations).
Interestingly, the claims at issue were based on state law and therefore were subject to state statutes of limitations, and the transfer was out-of-state. This raises questions of venue, Erie, and conflict of laws. Yummy! I do note that the court expressly acknowledged that because the two states' statutes of limitations were identical, it did not reach any issues that might arise if the statutes of limitations applied by the two courts were different.
UPDATE: I have corrected the date the opinion was filed.
UPDATE #2: In reporting on the case, I took the Third Circuit’s word when it characterized the Fourth, Seventh, Eighth, and Eleventh Circuits as reaching different results. Fortunately, there are those who actually read the underlying cases. Hat tip to Kevin Clermont, who concludes that Lafferty misread those Circuits’ precedents and that the rule is fairly straightforward and uniform: The § 1406(a) transferee court applies transferee law, except that the transferee’s SOL will be tolled by the initial filing if within both the transferor’s and transferee’s limitations period. Thanks, Kevin!