In Re General Motors Corp. Pick-Up Truck Fuel Tank Products Liability Litigation

Opinions of the United
1995 Decisions States Court of Appeals
for the Third Circuit
4-17-1995
In Re: General Motors Corp.
Precedential or Non-Precedential:
Docket 94-1064
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"In Re: General Motors Corp." (1995). 1995 Decisions. Paper 98.
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UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
_______________________
Nos. 94-1064, 94-1194, 94-1195
94-1198, 94-1202, 94-1203, 94-1207
94-1208 and 94-1219
___________
IN RE: GENERAL MOTORS CORPORATION
PICK-UP TRUCK FUEL TANK PRODUCTS
LIABILITY LITIGATION
Jack French, Robert M. West, Charles E. Merritt,
Gary Blades, Dawn and Tracey Best, Gary and
Jackie Barnes, Betty Marteny, John and Mary
Southands, Edmund Berning, Dale W. Plummer,
Edmund and Anneta Casey, John and Connie Yonki,
Carl and Kathryn Corona, Dallas and Patricia
Nelson, Mynard and Mildred Duncan, Kirby L.
Stegman, DeWayne Anderson, Morris and Barbara Betzold,
Appellants in No. 94-1064
Rudolph Jenkins, William D. Cunningham,
Mather Johnson, Forrest Charles Ginn,
Buren William Jones and Martin D. Parkman,
Appellants in No. 94-1194
(Civ. No. 92-cv-06450)
_______________________________
Parish of Jefferson,
Appellant in No. 94-1195
The State of New York
Appellant in No. 94-1198
Elton Wilson, individually, and
Frank I. Owen, individually and on
behalf of the residents of the
State of Alabama
Appellants in No. 94-1202
City of New York
Appellant in No. 94-1203
Betty Youngs, Barbara Phillips,
Margaret Engel, Larry Swope,
Robbin Maxwell and Center for
Auto Safety
Appellants in No. 94-1207
Betty Youngs, Barbara Phillips,
Margaret Engel, Larry Swope,
Robbin Maxwell and Center for
Auto Safety
Appellants in No. 94-1208
Commonwealth of Pennsylvania,
Department of Transportation
Appellant in No. 94-1219
(Civ. No. MDL-961)
_________________________________________
On Appeal From the United States District Court
For the Eastern District of Pennsylvania
___________________________________
Argued: August 11, 1994
Before: BECKER, ALITO, and GIBSON,*
Circuit Judges.
(Filed April 17, 1995)
JAMES A. SCHINK, ESQUIRE (ARGUED)
J. ANDREW LANAGAN, ESQUIRE
ROBERT B. ELLIS, ESQUIRE
Kirkland & Ellis
200 East Randolph Drive
Chicago, Illinois 60601
GEORGE J. LAVIN, JR., ESQUIRE
FRANCIS P. BURNS, III, ESQUIRE
*
. Honorable John R. Gibson, United States Circuit Judge for the
Eighth Circuit, sitting by designation.
Lavin, Coleman, Finarelli & Gray
12th Floor Penn Mutual Tower
510 Walnut Street
Philadelphia, PA 19106
LEE A. SCHUTZMAN, ESQUIRE
E.D.WARD C. WOLFE
General Motors Corporation
New Center One Building
3031 West Grand Blvd.
P.O. Box 33122
Detroit, Michigan 48232
Attorneys for General Motors
Corporation, Appellee
ANDREW M. HUTTON, ESQUIRE
DEREK S. CASEY, ESQUIRE
PAUL Benton WEEKS, III, ESQUIRE
Michaud, Hutton, Fisher & Anderson
8100 East 22nd Street North
Building 1200
Wichita, Kansas 67226-2312
Attorneys for Jack French, Robert M.
West, Charles E. Merritt, Gary Blades,
Dawn Best, Tracey Best, Gary Barnes,
Jackie Barnes, Betty Marteny, John
Southards, Mary Southards, Edmund
Berning, Dale W. Plummer, Edmund Casey,
Anneta Casey, John Yonki, Connie Yonki,
Carl Corona, Kathryn Corona, Dallas
Nelson, Patricia Nelson, Mynard Duncan,
Mildred Duncan, Kirby L. Stegman,
Dewayne Anderson, Morris Betzold,
Barbara Betzold, Dennis Acuma,
Appellants
DIANE M. NAST, ESQUIRE (ARGUED)
WILLIAM E. HOESE, ESQUIRE
Kohn, Swift & Graf, P.C.
1101 Market Street, Suite 2400
Philadelphia, PA 19107-2927
ELIZABETH J. CABRASER, ESQUIRE (ARGUED)
MICHAEL F. RAM, ESQUIRE
Lieff, Cabraser & Heimann
275 Battery Street, 30th Floor
San Francisco, CA 94111-3339
Attorneys for Dennis Acuma,
John E. Martin,
Plaintiff Class/Appellees
JOHN W. BARRETT, ESQUIRE
Barrett Law Offices
404 Court Square North
P.O. Box 631
Lexington, MS 39095
Attorney for John Mayhall, Brendan
Hayes, Jimmy Benson, Jimmy Haddock,
Dennis Nabors, Marcia Baldwin,
Appellees
WILLIAM S. LERACH, ESQUIRE
Milberg, Weiss, Bershad, Hynes
& Lerach
600 West Broadway
Suite 1800
San Diego, CA 92101
Attorneys for William A. Lewis,
David Grubbs, Raymond Carver,
Johnny S. Martinez, Robert A. Flowers,
Stone Ridge Agri, Inc., James McKinnish,
Douglas A. Livingston,
Appellees
RICHARD S. SCHIFFRIN, ESQUIRE
Schiffrin & Craig
Three Bala Plaza East
Suite 500
Bala Cynwyd, PA 19004
Attorneys for Johnny S. Martinez,
Joseph St. Clair,
Appellees
PATRICIA J. CLANCY, ESQUIRE
Senior Deputy County Counsel
County of Santa Barbara
105 East Anapamu Street, Suite 201
Santa Barbara, CA 93101
Attorney for City of Los Angeles,
Alameda City, Santa Barbara City,
Utah City, Washington, City,
Amicus-Appellee
JAMES E. BUTLER, JR., ESQUIRE (ARGUED)
ROBERT D. CHEELEY, ESQUIRE
PETER J. DAUGHTERY
Butler, Wooten, Overby & Cheeley
1500 2nd Avenue
Columbus, GA 31902
Attorneys for Rudolph Jenkins,
William D. Cunningham, Mather Johnson,
Forrest Charles Ginn, Buren William
Jones, Martin D. Parkman,
HANS J. LILJEBERG, ESQUIRE
Jefferson Parish Attorney's Office
New Courthouse Building
Suite 527
Gretna, LA 70053
JERON J. LaFARGUE, ESQUIRE
Jefferson Parish Attorney's Office
1221 Elmwood Park Blvd.
Room 701
Harahan, LA 70123
Attorneys for Parish of Jefferson,
Appellant
G. OLIVER KOPPELL, ESQUIRE
Attorney General of the State
of New York
PETER H. SCHIFF, ESQUIRE
Deputy Solicitor General
NANCY A. SPIEGEL, ESQUIRE
Assistant Attorney General
ANDREA OSER, ESQUIRE
Assistant Attorney General
New York State Department of Law
The Capitol
Albany, NY 12224
Attorney for State of New York,
Appellant
MICHAEL J. EVANS, ESQUIRE
STEVEN D. KING, ESQUIRE
Longshore, Evans & Longshore
2001 Park Place
650 Park Place Tower
Birmingham, AL 35203
Attorneys for Elton Wilson,
individually, Frank I. Owen,
individually and on behalf of the
residents of the State of Alabama,
Appellants
JOHN HOGROGIAN, ESQUIRE
New York City Law Department
100 Church Street
New York, NY 10007
Attorney for City of New York,
Appellant
BRIAN S. WOLFMAN, ESQUIRE (ARGUED)
DAVID C. VLADECK, ESQUIRE
Public Citizen Litigation Group
2000 P Street, N.W., Suite 700
Washington, DC 20036
C. RAY GOLD, ESQUIRE
Center for Auto Safety
2001 S Street, NW
Washington, DC 20009
Attorneys for Betty Youngs, Barbara
Phillips, Margaret Engel, Larry Swope,
Robbin Maxwell, Center for Auto Safety,
Appellants
STEPHEN F.J. MARTIN, ESQUIRE (ARGUED)
Assistant Counsel In-Charge
STEVEN I. ROTH, ESQUIRE
Assistant Counsel
ROBERT J. SHEA, ESQUIRE
Assistant Chief Counsel
JOHN L. HEATON, ESQUIRE
Chief Counsel
Office of Chief Counsel
Department of Transportation
521 Transportation & Safety Bldg.
Harrisburg, PA 17120
Attorneys for Commonwealth of
Pennsylvania, Appellant
TABLE OF CONTENTS
I. FACTS, PROCEDURAL HISTORY, AND STANDARD OF REVIEW .................. 15
A. General Background.............................. 15
B. The Settlement Agreement........................ 18
C. Approval of the Settlement and Fees............. 20
D. The NHTSA Investigation......................... 23
E. Standard of Review.............................. 24
II. ANATOMY OF THE CLASS CLAIMS ................................... 25
III. RULE 23 - RELEVANT FUNDAMENTAL PRINCIPLES ...................... 27
IV. SETTLEMENT CLASSES .......................................... 33
A. Nature of the Device............................ 33
B. Perceived Problems of Settlement Classes........ 35
C. Arguments Favoring Settlement Classes........... 44
D. Are Settlement Classes Cognizable Under
Rule 23?....................................... 50
E. Are the Rule 23(a) and (b) Findings
Required for Settlement Classes? Does
Finding the Settlement to Be Fair and
Reasonable Serve as a Surrogate for the
Findings?...................................... 55
F. Can There be a Valid Settlement Class
That Would Not Serve as a Valid
Litigation Class?.............................. 64
V. IS THE SETTLEMENT CLASS PROPER HERE? ............................ 69
A. Were There Adequate Findings Under Rule
23(a)?......................................... 69
B. Could the Class Requisites Have Been Met
On The Current Record?......................... 70
1. Numerosity, Commonality, and
Typicality........................... 70
2. Adequacy of Representation................. 71
a. The Situation of the Fleet
Owners........................ 71
b. Did Counsel Adequately
Represent the
Interests of the Entire Class? 73
VI. Is the Settlement Fair, Reasonable, and Adequate?........ 82
A. Adequacy of Settlement - General
Principles..................................... 87
1. Valuation of the Settlement -
Introduction......................... 88
a. Plaintiffs' Witness Dr.
Itmar Simonsen................ 89
b. Inability of Class Members
to Use Certificates........... 91
c. Value of the Transfer
Option........................ 94
d. GM's Implicit Valuation of
the Claim..................... 96
2. Valuing This Settlement Relative to
The Relief Requested................. 98
a. The Retrofit Issue............... 99
b. Availability of Other
Remedies......................100
B. Complexity of the Suit..........................102
C. Reaction of the Class...........................103
D. Stage of Proceedings............................106
E. Risks of Establishing Liability.................109
F. Risks of Establishing Damages...................113
G. Risks of Maintaining Class Status................116
H. Ability to Withstand Greater Judgment...........120
I. Summary.........................................120
VII. APPROVAL OF THE ATTORNEYS' FEE AWARD ...........................122
VIII. OTHER ISSUES; CONCLUSION ...................................131
_____________________________
OPINION OF THE COURT
_____________________________
BECKER, Circuit Judge.
This is an appeal from an order of the District Court
for the Eastern District of Pennsylvania approving the settlement
of a large class action following its certification of a so-
called settlement class. Numerous objectors challenge the
fairness and reasonableness of the settlement. The objectors
also challenge: (1) the district court's failure to certify the
class formally; (2) its denial of discovery concerning the
settlement negotiations; (3) the adequacy of the notice as it
pertained to the fee request; and (4) its approval of the
attorneys' fee agreement between the defendants and the attorneys
for the class, which the class notice did not fully disclose,
thereby (allegedly) depriving the class of the practical
opportunity to object to the proposed fee award at the fairness
hearing.
The class members are purchasers, over a 15 year
period, of mid- and full-sized General Motors pick-up trucks with
model C, K, R, or V chassis, which, it was subsequently
determined, may have had a design defect in their location of the
fuel tank. Objectors claim that the side-saddle tanks rendered
the trucks especially vulnerable to fuel fires in side
collisions. Many of the class members are individual owners
(i.e., own a single truck), while others are "fleet owners," who
own a number of trucks. Many of the fleet owners are
governmental agencies. As will become apparent, the negotiated
settlement treats fleet owners quite differently from individual
owners, a fact with serious implications for the fairness of the
settlement and the adequacy of representation of the class.
While all the issues we have mentioned are significant
(except for the discovery issue), the threshold and most
important issue concerns the propriety and prerequisites of
settlement classes. The settlement class device is not mentioned
in the class action rule, Federal Rule of Civil Procedure 23.1
1
. Rule 23 provides, in pertinent part:
(a) Prerequisites to a Class Action. One or more members of
a class may sue or be sued as representative parties on behalf of
all only if (1) the class is so numerous that joinder of all
members is impracticable, (2) there are questions of law or fact
common to the class, (3) the claims or defenses of the
representative parties are typical of the claims or defenses of
the class, and (4) the representative parties will fairly and
adequately protect the interests of the class.
(b) Class Actions Maintainable. An action may be maintained
as a class action if the prerequisites of subdivision (a) are
satisfied, and in addition:
(1) the prosecution of separate actions by or against
individual members of the class would create a risk of
(A) inconsistent or varying adjudications with
respect to individual members of the class which would establish
incompatible standards of conduct for the party opposing the
class, or
(B) adjudications with respect to individual members
of the class which would as a practical matter be dispositive of
the interests of the other members not parties to the
adjudications or substantially impair or impede their ability to
protect their interests; or
(2) the party opposing the class has acted or refused
to act on grounds generally applicable to the class, thereby
Rather it is a judicially crafted procedure. Usually, the
request for a settlement class is presented to the court by both
plaintiff(s) and defendant(s); having provisionally settled the
case before seeking certification, the parties move for
simultaneous class certification and settlement approval. Because
this process is removed from the normal, adversarial, litigation
mode, the class is certified for settlement purposes only, not
for litigation. Sometimes, as here, the parties reach a
settlement while the case is in litigation posture, only then
moving the court, with the defendants' stipulation as to the
(..continued)
making appropriate final injunctive relief or corresponding
declaratory relief with respect to the class as a whole; or
(3) the court finds that the questions of law or fact
common to the members of the class predominate over any questions
affecting only individual members, and that a class action is
superior to other available methods for the fair and efficient
adjudication of the controversy. The matters pertinent to the
findings include: (A) the interest of members of the class in
individually controlling the prosecution or defense of separate
actions; (B) the extent and nature of any litigation concerning
the controversy already commenced by or against members of the
class; (C) the desirability or undesirability of concentrating
the litigation of the claims in the particular forum; (D) the
difficulties likely to be encountered in the management of a
class action.
(c) Determination by Order Whether Class Action to be
Maintained; Notice; Judgment; Actions Conducted Partially as
Class Actions.
(1) As soon as practicable after the commencement of an
action brought as a class action, the court shall determine by
order whether it is to be so maintained. An order under this
subdivision may be conditional, and may be altered or amended
before the decision on the merits. . . .
(e) Dismissal or Compromise. A class action shall not be
dismissed or compromised without the approval of the court, and
notice of the proposed dismissal or compromise shall be given to
all members of the class in such manner as the court directs.
class's compliance with the Rule 23 requisites, for class
certification and settlement approval. In any event, the court
disseminates notice of the proposed settlement and fairness
hearing at the same time it notifies class members of the
pendency of class action determination. Only when the settlement
is about to be finally approved does the court formally certify
the class, thus binding the interests of its members by the
settlement.
The first Manual for Complex Litigation [hereinafter
MCL] strongly disapproved of settlement classes. Nevertheless,
courts have increasingly used the device in recent years, and
subsequent manuals (MCL 2d and MCL 3d (in draft)) have relented,
endorsing settlement classes under carefully controlled
circumstances, but continuing to warn of the potential for abuse.
This increased use of settlement classes has proven extremely
valuable for disposing of major and complex national and
international class actions in a variety of substantive areas
ranging from toxic torts (Agent Orange) and medical devices
(Dalkon Shield, breast implant), to antitrust cases (the beef or
cardboard container industries). But their use has not been
problem free, provoking a barrage of criticism that the device is
a vehicle for collusive settlements that primarily serve the
interests of defendants -- by granting expansive protection from
law suits -- and of plaintiffs' counsel -- by generating large
fees gladly paid by defendants as a quid pro quo for finally
disposing of many troublesome claims.
After reflection upon these concerns, we conclude that
Rule 23 permits courts to achieve the significant benefits
created by settlement classes so long as these courts abide by
all of the fundaments of the Rule. Settlement classes must
satisfy the Rule 23(a) requirements of numerosity, commonality,
typicality, and adequacy of representation, as well as the
relevant 23(b) requirements, usually (as in this case) the (b)(3)
superiority and predominance standards. We also hold that
settlement class status (on which settlement approval depends)
should not be sustained unless the record establishes, by
findings of the district judge, that the same requisites of the
Rule are satisfied. Additionally, we hold that a finding that
the settlement was fair and reasonable does not serve as a
surrogate for the class findings, and also that there is no lower
standard for the certification of settlement classes than there
is for litigation classes. But so long as the four requirements
of 23(a) and the appropriate requirement(s) of 23(b) are met, a
court may legitimately certify the class under the Rule.
In this case the district judge made no Rule 23
findings, and significant questions remain as to whether the
class could have met the requisites of the rule had the district
court applied them. Principally at issue is adequacy of
representation. In particular, the objectors contend that there
is a conflict between the positions of individual owners on the
one hand and fleet owners on the other hand. The disparity in
settlement benefits enjoyed by these different groups, objectors
argue, creates an intra-class conflict that precludes the finding
of adequacy of representation required by the rule. Moreover,
they submit, the large number of different defenses available
under the laws of the several states involved also creates a
potentially serious commonality and typicality problem.
We conclude that the objectors' adequacy of
representation claim probably has merit. At all events, the
district court did not properly evaluate the differential impact
of the settlement on individual fleet owners, and should
determine on remand whether the conflicts among class members are
so great as to preclude certification (or at least sufficient to
require the creation of subclasses). The district court should
also focus on the commonality and typicality problems, to
determine whether the national scope of the class litigation and
the plethora of defenses available in different jurisdictions
prevent these requirements from being met.
For the reasons that follow at some length, we conclude
that, although settlement classes are valid generally, this
settlement class was not properly certified. We also conclude
that the settlement is not fair and adequate; more precisely, we
hold that the district court abused its discretion in determining
that it was, primarily because the district court erred in
accepting plaintiffs' unreasonably high estimate of the
settlement's worth, in over-estimating the risk of maintaining
class status and of establishing liability and damages, and in
misinterpreting the reaction of the class. Finally, although our
disposition of the foregoing issues makes it unnecessary for us
to pass on the approval of the attorneys fees, we clarify the
governing standards for these fee awards to guide the district
court on remand. We therefore reverse the challenged order of
the district court and remand for further proceedings.
I. FACTS, PROCEDURAL HISTORY, AND STANDARD OF REVIEW
A. General Background
Between 1973 and 1987, General Motors sold over 6.3
million C/K pickup trucks with side-mounted fuel tanks.2 In late
October 1992, after the public announcement of previously
undisclosed information regarding the safety of the fuel tank
placement in GM pickups, consumer class action lawsuits were
filed in several jurisdictions. The National Highway Traffic
Safety Administration ("NHTSA") commenced an investigation of the
alleged defects relating to side-impact fires on these trucks,
and consumer advocacy groups sought a recall.3
On November 5, 1992, plaintiffs in one action sought to
enjoin allegedly misleading communications to putative class
2
. The class includes both mid-and full-size trucks with
chassis model types C, K, R, or V.
3
. See note 5 infra.
members and filed an application for expedited discovery. On
November 8 and 9, 1992, GM filed notices of removal of this and
other state court actions, and a motion with the Judicial Panel
on Multidistrict Litigation ("MDL Panel") to transfer and
consolidate all actions for pretrial purposes under 28 U.S.C.
§ 1407. The MDL Panel transferred all related actions to the
District Court for the Eastern District of Pennsylvania on
February 26, 1993. Ultimately, dozens of actions were filed in
various courts throughout the United States on behalf of consumer
classes; the federal cases were dismissed, remanded to state
court, or transferred to the Eastern District of Pennsylvania.
On March 5, 1993, pursuant to an order of the
(transferee) District Court, plaintiffs filed a Consolidated
Amended Class Action Complaint seeking equitable relief and
damages that consolidated all of the actions under the MDL
caption and listed nearly 300 representative plaintiffs,
including both individual and fleet owners. The Complaint
alleged violations of two federal statutes; the Magnuson-Moss Act
and the Lanham Trademark Act; a variety of common law and
statutory claims, including negligence, fraud, breach of written
and implied warranty; and violations of various state consumer
statutes. The complaint sought, inter alia, an order remedying
the alleged abnormally high incidence of fuel-fed fires following
side-impact collisions by requiring GM to recall the trucks or
pay for their repair. (JA 37, 93.) GM answered this complaint,
denying all substantive allegations and raising numerous
affirmative defenses.
Also on March 5, 1993, plaintiffs filed a consolidated
motion for nationwide class certification. The court set July
19, 1993, the hearing date on this motion. On March 30, 1993, GM
moved to stay this litigation pending the outcome of the NHTSA
investigation, initiated in December 1992. This motion was
denied on June 4, 1993. Pursuant to a scheduling order issued by
the court, discovery during the spring of 1993 focused on class
certification issues. (JA1824-27.) During this discovery, GM
produced more than 100,000 pages of documents from prior C/K
pickup product liability lawsuits and GM's responses to NHTSA
information requests. Plaintiffs also had access to the
depositions and trial testimony in other cases involving the fuel
tank design of C/K pickups, including the jury trial in Moseley
v. GM, No. 90-V-6276 (Fulton County, Ga.). Plaintiffs consulted
with their own experts to evaluate this information. In
addition, depositions were taken of some GM personnel and certain
named plaintiffs. Discovery on the merits of the case had been
postponed until autumn 1993. Nothing in the record indicates
that, as of the spring of 1993, counsel had identified expert
witnesses for trial or deposed GM's engineering experts.
In the midst of these proceedings, the parties began
exploring a possible settlement of the litigation. These
discussions intensified in June 1993, at which time face-to-face
and telephonic meetings, both between the parties and among
plaintiffs' counsel, took place on virtually a daily basis. On
July 19, 1993, the parties reached a settlement in principle,
reduced the terms to writing, and informed the district court.4
For purposes of settlement only and without prejudice to GM's
substantial opposition to class certification, the named parties
agreed to the certification of a settlement class of C/K pickup
owners, described below.
B. The Settlement Agreement
In general terms, the settlement agreement provides for
members of the settlement class to receive $1,000 coupons
redeemable toward the purchase of any new GMC Truck or Chevrolet
light duty truck. Settlement certificates are transferable with
the vehicle. They are redeemable by the then current owner of
the 1973-86 C/K and 1987-91 R/V light duty pickup trucks or
chassis cabs at any authorized Chevrolet or GMC Truck dealer for
a fifteen month period. Settlement class members do not have to
trade in their current vehicle to use the certificate, and the
4
. GM reached a substantially identical agreement with counsel
representing a class of C/K pickup truck purchasers who are Texas
residents in Dollar v. General Motors, No. 92-1089 (71st Judicial
District, Marshall, Tex.)(JA1708, 1746). That settlement was
approved in November 1993, but was overturned on appeal on June
22, 1994. See Bloyed v. General Motors Corporation, Dollar et
al., 881 S.W. 422 (6th App. Dist., Tex. June 22, 1994), discussed
infra at VI(I). The Texas Supreme Court granted GM's Application
for Writ of Error on February 16, 1995 and set the case for oral
argument on March 21, 1995.
certificates can be used in conjunction with GM and GMAC
incentive programs.
The class members can freely transfer the certificate
to an immediate family member who resides with the class member.
Class members can also transfer the $1000 certificate to a family
member who does not reside with the class member by designating
the transferee family member within sixty days, running from the
date that GM mailed notice of the proposed settlement.
Additionally, the $1000 certificate can be transferred with the
title to the settlement class vehicle, that is, to a third party
who purchases the class member's vehicle.
In lieu of a $1,000 certificate, and without
transferring title to the settlement class vehicle, a class
member may instead request that a nontransferable $500
certificate (counterintuitively known as the "transfer
certificate") be issued to any third party except a GMC dealer or
its affiliates. This $500 certificate is redeemable with the
purchase of a new C or K series GMC or Chevrolet full-size pickup
truck or its replacement model. The $500 certificate cannot be
used in conjunction with any GMC or GMAC marketing incentive,
must be used on the more expensive full size models, and is
subject to the same fifteen-month redemption period as the $1,000
certificates. The class member must make a notarized request to
GM, and GM will mail the $500 certificate to the transferee
within 14 days of its receipt of the request for transfer.
Under the terms of the agreement, the approval of the
settlement and corresponding entry of final judgment would have
no effect upon any accrued or future claims for personal injury
or death, nor would it affect the rights of settlement class
members to participate in any future remedial action that might
be required under the National Traffic and Motor Safety Act of
1966, 15 U.S.C. §§ 1381 et seq. (1995).5 (JA 1750, 1763-64.)
The settlement agreement before us also provides that
plaintiffs' counsel would apply to the district court for an
award of reasonable attorneys' fees and reimbursement of
expenses, both to be paid by GM. GM reserved the right to object
to any fees or expenses it deemed to be excessive and to appeal
any amount awarded by the court over its objection. (JA 1750,
1755-56.) Plaintiffs' counsel filed their fee applications on or
about September 15, 1993; the fee applications remained in the
files of the clerk of the district court where class members
could theoretically review them, but no information about
attorneys' fees other than the fact that a fee application would
be made was included in the class notice. GM did not file any
formal objections to the fee applications.
5
. After oral argument in this case, United States
Transportation Secretary Federico Pena announced that NHTSA had
settled the proceeding involving the C/K trucks at issue here
without ordering a recall, finding an acceptable retrofit, or
giving any compensation to the truck owners. The settlement
provided that GM would contribute $51 million to general safety
programs unrelated to the trucks' alleged problems. See
Statement by Secretary Federico Pena on Dec. 2, 1994, Settlement
Regarding DOT Investigation of General Motors C/K Pickup Trucks.
C. Approval of the Settlement and Fees
The district court reviewed the substantive terms of
the settlement on July 12, 1993 and made the preliminary
determination, in Pretrial Order No. 7, entered July 20, 1993,
that the proposed settlement appeared reasonable. (JA 1828-33.)
Also in pretrial order no. 7, the court "provisionally" certified
the class of GM truck owners as a settlement class (i.e., for
settlement purposes only) pursuant to Rule 23(b)(3); however, the
court did not make findings that the requisites of Rule 23(a) or
23(b) were satisfied. (JA 1828-33.) The court approved the form
of and dissemination to putative class members of the combined
notice of the pendency of the action and the proposed settlement
pursuant to Rules 23(c)(2) and 23(e). The class definition
included all persons and entities who purchased in the United
States (except for residents of the State of Texas) and were
owners as of July 19, 1993 of (1) a 1973-1986 model year General
Motors full-size pickup truck or chassis cab of the "C" or "K"
series; or (2) a 1987-1991 model year General Motors full-size
pickup truck or chassis cab of the "R" or "V" series. (JA 1828.)
On August 20 and 21, 1993, GM mailed the notice to all registered
owners of class vehicles (including nearly 5.7 million vehicles),
and it published the full text of the notice in USA Today and The
Philadelphia Inquirer on August 27, 1993.
In response to the notice, over 5,200 truck owners
elected to opt out of the class, and approximately 6,500 truck
owners (a number which includes fleet owners who own as many as
1,000 vehicles each) objected to the settlement. The objectors'
filings contained many overlapping claims. The recurring
contentions were that: (1) the settlement does nothing to fix
the trucks (JA 1854,55,57); (2) even with the $1,000 coupon, many
owners would be unable to purchase a new truck given their high
cost (with list prices from $11,000 to $33,000); (3) state and
local government fleet owners would not be able to redeem all of
their certificates (by buying new vehicles) within the short
redemption period (fifteen months), and they might be further
restricted from using the coupons by competitive bidding
procurement rules; and (4) GM and class counsel colluded in a
manner that compromised the interests of the class and that would
preclude a finding of adequate representation. GM rejoined with
voluminous material emphasizing the substantial risks plaintiffs
faced not only in maintaining class treatment but also in
establishing liability and damages.
A settlement fairness hearing was held on October 26,
1993 during which the objectors who submitted written briefs were
permitted to speak. The district court approved the settlement
in a Memorandum and Order dated December 16, 1993. In that
order, the court confirmed its Pretrial Order No. 7, which had
provisionally certified the settlement class. Although the court
still made no findings that the requisites of Rules 23(a) and (b)
were met, it did set forth findings of fact and conclusions of
law to justify its approval of the settlement as fair, reasonable
and adequate based on the nine-factor test established in Girsh
v. Jepson, 521 F.2d 153 (3d Cir. 1975).
The court found that the total economic value of the
settlement was "between $1.98 billion and $2.18 billion." (App.
1727) Against the prospect of settlement, the court weighed each
of the nine Girsh factors. It concluded that "the complexity,
expense and likely duration of the litigation would be mammoth."
(op. 6)(JA 1708, 1713) Although the settlement was reached at an
early stage of the litigation, just four months after the
consolidated complaint was filed, the court found that this did
not weigh against the settlement because the court believed that
the parties had access to "extensive discovery on the same issues
of product defect that was previously conducted in the various
personal injury actions that have been litigated throughout the
country." (op. 8-9)(JA1715-16) The district court also found
that the reaction of class members to the proposed settlement
supported approval citing "the infinitesimal number of truck
owners who have either objected to or sought exclusion from the
settlement." (JA1715.)
Noting the divided results of the personal-injury jury
trials and the numerous defenses GM could raise, the court found
that "a substantial risk in establishing liability" weighed in
favor of approval. Similarly, the court found that "[p]erhaps
the greatest weakness in the plaintiffs' case is the lack of
proof of economic damages." (JA1721.) The court also addressed
the objection that the settlement did not provide for a recall or
a "fix," explaining that "no objector that complains that the
settlement fails to retrofit the alleged defect has been able to
come forth with a practical and safe modification for the trucks
that has been designed, evaluated and tested." (JA1736.)
On December 20, 1993, four days after approving the
settlement, the district court also approved the class counsel's
request for attorneys' fees in the amount of $9.5 million.
Although the court did not believe at that time that it needed to
review that fee award, to which GM had agreed, it subsequently,
on February 2, 1994, issued an "amplified order" evaluating the
award in greater detail. The court determined that the fee
request was reasonable under both a lodestar analysis and the
percentage-of-recovery method (see Part VII infra). (JA 1775.)
D. The NHTSA Investigation
While this case was under submission to this court, the
NHTSA investigation continued. Over the objections of some of
NHTSA's engineers who had determined that the trucks complied
with relevant safety standards, on October 17, 1994, Secretary of
Transportation Federico Pena announced the agency's finding that
the trucks contained a safety defect creating an increased and
unreasonable risk of side-impact fires. The determination was
based on the allegedly enhanced risk of side-impact fires
relative to Ford pickups that resulted from GM's placement of the
fuel tanks outside the frame rails. GM challenged the propriety
of the public meeting NHTSA planned to hold and NHTSA's authority
to order a recall of vehicles that met all relevant safety
standards. On December 2, 1994, Secretary Pena announced the
settlement of the C/K pickup investigation wherein GM contributed
over $51 million for a variety of safety programs unrelated to
the pickups, and admitted no liability.6
E. Standard of Review
Each of the issues presented here is reviewable for
abuse of discretion. See Bryan v. Pittsburgh Plate Glass Co.,
494 F.2d 799 (3d Cir.), cert. denied, 419 U.S. 900 (1974)
(approval of proposed class action settlement); In re School
Asbestos Litig., 921 F.2d 1338, 1341 (3d Cir. 1990), cert.
denied, 499 U.S. 976 (1991) (class certification); Lindy Bros.
Builders, Inc. v. American Radiator & Standard Sanitary Corp.,
540 F.2d 102, 115 (3d Cir. 1976) (award of reasonable attorney's
fees); Marrogquin-Manriquez v. INS, 699 F.2d 129, 134 (3d Cir.
1983), cert. denied, 467 U.S. 1259 (1984) (scope of discovery).
An appellate court may find an abuse of discretion where the
"district court's decision rests upon a clearly erroneous finding
of fact, an errant conclusion of law or an improper application
of law to fact." International Union, UAW v. Mack Trucks, Inc.,
820 F.2d 91, 95 (3d Cir. 1987), cert. denied, 499 U.S. 921
(1991). A finding of fact is clearly erroneous when, although
6
. See note 5 supra.
there is evidence to support it, the reviewing court, based on
the entire evidence, concludes with firm conviction that a
mistake has been made. Oberti v. Board. of Ed. of Borough of
Clementon Sch. Dist., 995 F.2d 1204, 1220 (3d Cir. 1993).
II. ANATOMY OF THE CLASS CLAIMS
The consolidated class complaint filed on behalf of the
nationwide class of GM truck owners (except those from Texas)
alleged violations of the Magnuson-Moss Warranty Act, 15 U.S.C.A.
§ 2310(d)(1) (1995); and the Lanham Act, 15 U.S.C.A. § 1125(a)
(1995); and a variety of state common law and statutory claims,
including strict liability in tort for selling a dangerously
defective product; negligent design; negligent misrepresentation;
fraud (based on defendants' alleged course of conduct in the
advertising, promotion, and sale of the GM pickups intentionally
concealing material facts about a dangerous latent defect);
breach of warranty, including written (from vehicle warranties),
express (from public representations by GM), implied (warranties
of merchantability) and statutory warranties; and finally
violations of various state consumer protection statutes. (JA37).
The case did not involve any pickup trucks that had actually
experienced fuel tank fires caused by side-impact collisions.
Moreover, personal injury or death claims were expressly omitted
from the complaint as well as from the settlement -- class
members remain free to pursue such claims if any should accrue.
The aggregated treatment of these claims was
potentially complicated by the differences in underlying facts.
The trucks at issue had nineteen different fuel tank systems;
proof might thus be required for each design on relevant issues.
Furthermore, unlike the federal securities laws where there is a
presumption of reliance on a material misrepresentation, see
Basic v. Levinson, 108 S. Ct. 978 (1988), plaintiffs would likely
have had to prove individual reliance on the allegedly misleading
materials under the various state laws applicable to most of
these claims. More fundamentally, the complaint itself invoked
state laws that implicated different legal standards on, for
example, the warranty claims (the laws contain various privity
requirements or the need for an allegedly defective product to
fail in service before a warranty claim can be sustained),
negligent misrepresentation, negligence, and strict products
liability. The state laws implicated by the filing of the
nationwide class action also differed on such issues as statutes
of limitations, whether pickup trucks are "consumer products;"
the application of durational limits on implied warranties; the
requirement of reliance to recover for fraud, misrepresentation,
and warranty claims; whether intent is a required element of
negligent misrepresentation claims; whether comparative fault is
a defense; and the relevant test for plaintiffs' design defect
claims.
III. RULE 23 - RELEVANT FUNDAMENTAL PRINCIPLES
Before turning to the precise questions at issue on
this appeal, it is important that we consider the several basic
purposes served by class actions in our contemporary, complex
litigation-laden legal system. One of the paramount values in
this system is efficiency. Class certification enables courts to
treat common claims together, obviating the need for repeated
adjudications of the same issues. See Vol. 1 HERBERT NEWBERG & ALBA
CONTE, NEWBERG ON CLASS ACTIONS § 1.06 (Third Ed. 1992); General Tel.
Co. v. Falcon, 457 U.S. 147, 149 (1982).
The Supreme Court has articulated other important
objectives served by class actions. Class actions achieve "the
protection of the defendant from inconsistent obligations, the
protection of the interests of absentees, the provision of a
convenient and economical means for disposing of similar
lawsuits, and the facilitation of the spreading of litigation
costs among numerous litigants with similar claims." United
States Parole Comm'n v. Geraghty, 445 U.S. 388 pinpoint (1980).
The Court has explained the significance of the last goal as
an evolutionary response to the existence of injuries
unremedied by the regulatory action of government.
Where it is not economically feasible to obtain relief
within the traditional framework of a multiplicity of
small individual suits for damages, aggrieved persons
may be without any effective redress unless they may
employ the class-action device.
Deposit Guaranty National Bank v. Roper, 445 U.S. 326, 339
(1980); see also Vol 1 NEWBERG & CONTE § 1.06 at 1-19. Cost
spreading can also enhance the means for private attorney general
enforcement and the resulting deterrence of wrongdoing. Id. §
1.06 at 1-18 to 1-20.
The law favors settlement, particularly in class
actions and other complex cases where substantial judicial
resources can be conserved by avoiding formal litigation. See
NEWBERG & CONTE § 11.41 at 11-85 (citing cases); Cotton v. Hinton,
559 F.2d 1326, 1331 (5th Cir. 1977); Van Brankhorst v. Safeco
Corp., 529 F.2d 943, 950 (9th Cir. 1976). The parties may also
gain significantly from avoiding the costs and risks of a lengthy
and complex trial. See First Com. Corp. of Boston Customer Accts
Litig., 119 F.R.D. 301, 306-07 (D. Mass. 1987). These economic
gains multiply when settlement also avoids the costs of
litigating class status -- often a complex litigation within
itself. Furthermore, a settlement may represent the best method
of distributing damage awards to injured plaintiffs, especially
where litigation would delay and consume the available resources
and where piecemeal settlement could result, in the Rule
23(b)(1)(B) limited fund context, in a sub-optimal distribution
of the damage awards. See, e.g., In re Dennis Greenman
Securities Litig., 829 F.2d 1539, 1542 (11th Cir. 1987).
Thus, courts should favor the use of devices that tend
to foster negotiated solutions to these actions. Prima facie,
this would include settlement classes. True, it was once thought
that mass tort actions were ordinarily not appropriate for class
treatment, see Fed. R. Civ. P. 23 Advisory Committee's note,
subdivision (b)(3), 39 F.R.D. 69, 103 (1966). It has also been
argued that mass tort cases strain the boundaries of Rule 23.
See Bruce H. Nielson, Was the 1966 Advisory Committee Right?:
Suggested Revisions of Rule 23 to Allow More Frequent Use of
Class Actions in Mass Tort Litigation, 25 HARV. J. LEGIS. 461
(1988) (suggesting necessity of rule revisions to accommodate
class action treatment of mass torts). However, the
applicability of Rule 23 to mass tort cases has become
commonplace, and the use of the class action device, specifically
the (b)(3) class, has created some of the largest and most
innovative settlements in these contexts. Prominent examples
include the recent $4.2 billion settlement of the breast implant
litigation. See In re Silicone Gel Breast Implant Prods.
Liability Litig., 1994 WL 578353 (N.D. Ala. 1994).
Despite the potential benefits of class actions, there
remains an overarching concern -- that absentees' interests are
being resolved and quite possibly bound by the operation of res
judicata even though most of the plaintiffs are not the real
parties to the suit. The protection of the absentees' due
process rights depends in part on the extent the named plaintiffs
are adequately interested to monitor the attorneys (who are, of
course, presumed motivated to achieve maximum results by the
prospect of substantial fees), and also on the extent that the
class representatives have interests that are sufficiently
aligned with the absentees to assure that the monitoring serves
the interests of the class as a whole. In addition, the court
plays the important role of protector of the absentees'
interests, in a sort of fiduciary capacity, by approving
appropriate representative plaintiffs and class counsel.
Another problem is that class actions create the
opportunity for a kind of legalized blackmail: a greedy and
unscrupulous plaintiff might use the threat of a large class
action, which can be costly to the defendant, to extract a
settlement far in excess of the individual claims' actual worth.
Because absentees are not parties to the action in any real
sense, and probably would not have brought their claims
individually, see Mars Steel v. Continental Illinois National
Bank & Trust, 834 F.2d 677, 678 (7th Cir. 1987), attorneys or
plaintiffs can abuse the suit nominally brought in the absentees'
names. As one court has noted, "[t]his fundamental departure
from the traditional pattern in Anglo-American litigation
generates a host of problems . . . ." Id.
The drafters designed the procedural requirements of
Rule 23, especially the requisites of subsection (a), so that the
court can assure, to the greatest extent possible, that the
actions are prosecuted on behalf of the actual class members in a
way that makes it fair to bind their interests. The rule thus
represents a measured response to the issues of how the due
process rights of absentee interests can be protected and how
absentees' represented status can be reconciled with a litigation
system premised on traditional bipolar litigation. Moreover, the
requirement in Rule 23(c) that the court decide certification
motions "as soon as practicable," see note 1 supra, aims to
reduce even further the possibility that a party could use the
ill-founded threat of a class action to control negotiations or
the possibility that absentees' interests could be unfairly
bound. Hence, the procedural formalities of certification are
important even if the case appears to be headed for settlement
rather than litigation.
This expanded role of the court in class actions
(relative to conventional bipolar litigation) continues even
after certification. While the parties in a normal suit do not
ordinarily require a judge's approval to settle the action, class
action parties do. Rule 23(e) provides: "A class action shall
not be dismissed or compromised without the approval of the
court, and notice of the proposed dismissal or compromise shall
be given to all members of the class in such manner as the court
directs." FED. R. CIV. P. 23(E). Courts and commentators have
interpreted this rule to require courts to "independently and
objectively analyze the evidence and circumstances before it in
order to determine whether the settlement is in the best interest
of those whose claims will be extinguished." 2 NEWBERG & CONTE §
11.41 at 11-88 to 11-89. "Under Rule 23(e) the district court
acts as a fiduciary who must serve as a guardian of the rights of
absent class members. . . . [T]he court cannot accept a
settlement that the proponents have not shown to be fair,
reasonable and adequate." Grunin v. International House of
Pancakes, 513 F.2d 114, 123 (8th Cir.) cert. denied, 423 U.S. 864
(1975); Malchman v. Davis, 706 F.2d 426, 433 (2d Cir. 1983); Sala
v. National RR Passenger Corp., 721 F. Supp. 80 (E.D. Pa. 1989);
see also Piambino v. Bailey, 610 F.2d 1306 (5th Cir.), cert
denied, 449 U.S. 1011 (1980).
Before sending notice of the settlement to the class,
the court will usually approve the settlement preliminarily.
This preliminary determination establishes an initial presumption
of fairness when the court finds that: (1) the negotiations
occurred at arm's length; (2) there was sufficient discovery; (3)
the proponents of the settlement are experienced in similar
litigation; and (4) only a small fraction of the class objected.
See 2 NEWBERG & CONTE § 11.41 at 11-91.
As noted above, this court has adopted a nine-factor
test to help district courts structure their final decisions to
approve settlements as fair, reasonable, and adequate as required
by Rule 23(e). See Girsh v. Jepson, 521 F.2d 153, 157 (3d Cir.
1975). Those factors are: (1) the complexity and duration of
the litigation; (2) the reaction of the class to the settlement;
(3) the stage of the proceedings; (4) the risks of establishing
liability; (5) the risks of establishing damages; (6) the risks
of maintaining a class action; (7) the ability of the defendants
to withstand a greater judgment; (8) the range of reasonableness
of the settlement in light of the best recovery; and (9) the
range of reasonableness of the settlement in light of all the
attendant risks of litigation. Id. The proponents of the
settlement bear the burden of proving that these factors weigh in
favor of approval. See GM Interchange, 594 F.2d 1106, 1126 n.30
7th Cir. 1979); Holden v. Burlington Northern, Inc., 665 F. Supp.
1398, 1407 (D. Minn. 1987); MCL 2d §30.44. The findings required
by the Girsh test are factual, see Malchman v. Davis, 706 F.2d at
434; Plummer v. Chemical Bank, 668 F.2d 564, 659 (2d Cir. 1982),
which will be upheld unless they are clearly erroneous,
Weinberger v. Kendrick, 698 F.2d 61, 73 (2d Cir. 1982), cert.
denied, 464 U.S. 818 (1983); In re Corrugated Container Antitrust
Litig., 643 F.2d 195, 207 (5th Cir. 1981).
IV. SETTLEMENT CLASSES
This appeal challenges (among other things) the
district court's class certification order. Before we may
address the propriety of the court's order we must first decide
whether it is ever proper to certify a class for settlement
purposes only. We therefore begin our analysis with a closer
look at how settlement classes operate.
A. Nature of the Device
As we have explained above, a settlement class is a
device whereby the court postpones the formal certification
procedure until the parties have successfully negotiated a
settlement, thus allowing a defendant to explore settlement
without conceding any of its arguments against certification.
Despite the directive of Rule 23(c) that courts certify actions
as soon as practicable, when a class action has been filed before
the settlement has been arrived at courts will often delay the
certification determination during the pendency of settlement
discussions. If the settlement negotiations succeed, courts will
certify the class for settlement purposes only and send a
combined notice of class pendency and settlements to the class
members. Thus, by the time the court considers certification,
the defendant has essentially stipulated to the existence of the
class requirements since it now has an interest in binding an
entire class with its proffered settlement.
By specifying certification for settlement purposes
only, however, the court preserves the defendant's ability to
contest certification should the settlement fall apart. Because
the court indulges the assumption of the class's existence only
until a settlement is reached or the parties abandon the
negotiations, settlement classes are also sometimes referred to
as temporary or provisional classes. Sometimes the specification
may also be seen as assuming that the class may only meet the
requirements of Rule 23 if the action is settled, and that
certification may in fact be inappropriate if the action will
actually be litigated. In any event, notwithstanding that there
is an absence of clear textual authorization for settlement
classes, many courts have indulged the stipulations of parties by
establishing temporary classes for settlement purposes only.
See, e.g., Mars Steel v. Continental Illinois Nat'l Bk. & Trust,
834 F.2d 677 (7th Cir. 1987); Weinberger v. Kendrick, 698 F.2d 61
(2d Cir. 1982), cert. denied, 464 U.S. 818 (1983); In re A.H.
Robins Co., 880 F.2d 709, 738-39 (4th Cir. 1989); In re Dennis
Greeman Sec. Litig., 829 F.2d 1539, 1543 (11th Cir. 1978);
Plummer v. Chemical Bank, 668 F.2d 564 (2d Cir. 1982); In re Beef
Industry Antitrust Litig., 607 F.2d 167, 173 (5th Cir. 1979);
Malchman v. Davis, 706 F.2d 427, 433-34 (2d Cir. 1983); In re
Taxable Mun. Bond Sec. Litig., 1994 WL 643142 (E.D. La. Nov. 15,
1994); In re Silicone Gel Breast Implant Prod. Liab. Litig., 1994
WL 578353 (N.D. Ala. Sept. 1, 1994); In re First Commodity Corp.
of Boston, 119 F.R.D. 301, 306-08 (D. Mass. 1987); In re
Bendectin, 102 F.R.D. 239, 240 (S.D. Oh. 1984), rev'd on other
grounds, 749 F.2d 300 (6th Cir. 1984); In re Mid-Atlantic Toyota
Anti-trust Litig., 564 F. Supp. 1379, 1388-90 (D. Md. 1983); In re
Chicken Antitrust Litig., 560 F. Supp. 957, 960 (N.D. Ga. 1980).
There has been a great deal of commentary, both
critical7 and laudatory,8 of the use of these "settlement
classes." And some courts have criticized these accommodations
7
. See, e.g., John C. Coffee, Jr., The Corruption of the Class
Action, WALL ST. J. Sept. 7, 1994, at A15.
8
. 2 Newberg & Conte § 11.27 (First) § 1.46; Roger H. Transgrud,
Joinder Alternatives in Mass Tort Litigation, 70 CORNELL L. REV.
779 (1985); Bruce H. Nielson, Was the 1966 Advisory Committee
Right?: Suggested Revisions of Rule 23 to Allow More Frequent
Use of Class Actions in Mass Tort Litigation, 25 HARV. J. LEGIS.
461, 480
of the negotiating parties and expressed their ambivalence while
continuing nonetheless to use them. See, e.g., Mars Steel, 834
F.2d 677 (7th Cir. 1987) (describing considerable dangers of
settlement classes but ultimately upholding the settlement).
Before we interpret the dictates of Rule 23 with respect to
settlement classes, it will be useful to survey both the
criticism and the praise.
B. Perceived Problems of Settlement Classes
A number of commentators, particularly the authors of
the first edition of the Manual for Complex Litigation, have
voiced serious concerns about settlement classes. These
criticisms have focused on the fact that Rule 23, a carefully
constructed scheme intended to protect the rights of absentees
that necessarily relies on active judicial participation to
protect those interests, does not authorize a separate category
of class certification that would permit a dilution of or
dispense with the subsection (a) criteria. § 1.46; see also Mars
Steel v. Continental Ill. Nat'l Bank & Trust, 834 F.2d 677, 680
(7th Cir. 1987); In re Baldwin United, 105 F.R.D. 475 (S.D.N.Y.
1984). Other criticisms focus on the potential prejudice to the
parties and the institutional threat posed to the court. See,
e.g., Coffee, supra note 10.
Rule 23 does not in terms authorize the deferral of
class certification pending settlement discussions. Indeed,
Rule 23(c) provides: "As soon as practicable after the
commencement of an action brought as a class action, the court
shall determine by order whether it is to be so maintained."
Fed. R. Civ. P. 23(a) (emphasis supplied). Deliberately delaying
a class certification determination so that settlement
discussions can proceed clearly does not represent an effort to
resolve the issue "as soon as practicable." As Judge Posner has
noted, "[i]t is hard to see why the propriety of maintaining the
suit as a class action could not 'practicably' have been
determined much earlier. And, common though the practice of
deferring class certification while settlement negotiations are
going on is, it not only jostles uneasily with the language of
Rule 23(c)(1) but also creates practical problems." Mars Steel,
834 F.2d at 680.
The danger here is that the court cannot properly
discharge its duty to protect the interests of the absentees
during the disposition of the action. Because the class has not
yet been defined, the court lacks the information necessary to
determine the identity of the absentees and the likely extent of
liability, damages, and expenses of preparing for trial. See MCL
2d § 30.45 at 243 ("No one may know how many members are in the
class, how large their potential claims are, what the strengths
and weaknesses of the parties' positions are, or how much the
class will benefit under the settlement."); In re Baldwin United,
105 F.R.D. 475, 481 (S.D.N.Y. 1984). Moreover, the court
performs its role as supervisor/protector without the benefit of
a full adversarial briefing on the certification issues. With
less information about the class, the judge cannot as effectively
monitor for collusion, individual settlements, buy-offs (where
some individuals use the class action device to benefit
themselves at the expense of absentees), and other abuses. See
In re Beef Indus. Antitrust Litig., 607 F.2d at 174. For
example, if the court fails to define the class before settlement
negotiations commence, then during the settlement approval phase
the judge will have greater difficulty detecting if the parties
improperly manipulated the scope of the class in order to buy the
defendant's acquiescence.
Settlement classes also make it more difficult for a
court to evaluate the settlement by depriving the judge of the
customary structural devices of Rule 23 and the presumptions of
propriety that they generate. Ordinarily, a court relies on
class status, particularly the adequacy of representation
required to maintain it, to infer that the settlement was the
product of arm's length negotiations. Cf. Weinberger v.
Kendrick, 698 F.2d 61, 74 (2d Cir. 1983) (noting protracted
nature of negotiations in approving settlement); City of Detroit
v. Grinnell, 495 F.2d 448, 463 (2d Cir. 1974) (same); In re
Baldwin-United, 105 F.R.D. 475, 482 (S.D.N.Y. 1984) (same).
Where the court has not yet certified a class or named its
representative or counsel, this assumption is questionable.
In effect, settlement classes can, depending how they
are used, evade the processes intended to protect the rights of
absentees. Indeed, the draft of the MCL (Third), although
considerably more receptive to settlement classes than the
earlier editions of the Manual, explains that "[t]he problem
presented by these requests is not the lack of sufficient
information and scrutiny, but rather the possibility that
fiduciary responsibilities of class counsel or class
representatives may have been compromised." MCL (Third) (draft)
at 193. Even some courts successfully using these devices to
achieve settlements apparently recognize these dangers since they
certify these actions more cautiously than ordinary classes.
See, e.g., Ace Heating & Plumbing Co. v. Crane Co., 453 F.2d 30,
33 (3d Cir. 1971) (court must be doubly careful where negotiation
occurs before certification and designation of a class counsel);
In re Beef Antitrust Litig., 607 F.2d 167, 176-77 (5th Cir. 1979)
(examining though ultimately rejecting the charge that collusion
precluded the certification of the settlement class); Simer v.
Rios, 661 F.2d 655, 664-66 (7th Cir. 1981) (requiring a higher
showing of fairness where settlement negotiated prior to
certification); Weinberger v. Kendrick, 698 F.2d 61, 69 (2d Cir.
1982) (judge made findings about discovery and counsel).
In particular, settlement classes create especially
lucrative opportunities for putative class attorneys to generate
fees for themselves without any effective monitoring by class
members who have not yet been apprised of the pendency of the
action. Moreover, because the court does not appoint a class
counsel until the case is certified, attorneys jockeying for
position might attempt to cut a deal with the defendants by
underselling the plaintiffs' claims relative to other attorneys.9
Unauthorized settlement negotiations occurring before the
certification determination thus "create the possibility of
negotiation from a position of weakness by the attorney who
purports to represent the class." GM Interchange Litigation, 594
F.2d 1106, 1125 (7th Cir. 1979). Pre-certification negotiations
also hamper a court's ability to review the true value of the
settlement or the legal services after the fact. See supra at
36. In addition, unauthorized negotiations also result in denying
other plaintiffs' counsel information that is necessary for them
to make an effective evaluation of the fairness of any settlement
that results. See GM Interchange, 594 F.2d at 1125.
Framed as an issue of Rule 23(a) requisites, these
considerations implicate adequacy of representation concerns:
"[a]rguments in opposition to settlement classes have merit when
they are addressed to the problem of inadequate representation or
possible collusion among the named plaintiffs and some or all
defendants." In re Baldwin-United Corp., 105 F.R.D. 475, 480
9
. These sorts of dynamics have led some critics to accuse class
action attorneys of ethical violations. While we emphasize that
counsel here committed no such violations, we do not preclude the
possibility that these violations could occur.
(S.D.N.Y. 1984). Another court has warned that the "danger of a
premature, even a collusive, settlement [is] increased when as in
this case the status of the action as a class action is not
determined until a settlement has been negotiated, with all the
momentum that a settlement agreement generates . . . ."; Mars
Steel, 834 F.2d at 680; see also Malchman, 706 F.2d at 433
(recognizing special potential for collusion or undue pressure by
defendants in settlement negotiations); Weinberger, 698 F.2d at
73 (requiring a higher showing of fairness to accommodate greater
potential for improper settlement). Settlement classes, which
constitute ad hoc adjustments to the carefully designed class
action framework constructed by Rule 23, lack the regulatory
mechanisms that ordinarily check this improper behavior: "There
is in fact little or no individual client consultation and no
judicial oversight of a hidden process of wheeling and dealing to
maximize overall recovery and fees for hundreds and thousands of
massed cases." In re Joint Eastern & Southern District Asbestos
Litigation, 129 B.R. 710, 802 (E & S.D.N.Y. 1991) (discussing the
ramifications of class treatment of mass torts).
In addition to these procedural problems (and the
problems created for a judge trying to evaluate both class status
and the adequacy of a class settlement simultaneously) the
earlier achievement of settlement through the use of a settlement
class also can lead to a settlement that may provide inadequate
consideration in exchange for the release of the class's claims.
With early settlement, both parties have less information on the
merits. That is, they have less information on the membership of
the class, on the size of potential claims, on whether the
settlement purports to resolve class or individual claims, on the
strengths and weaknesses of the case, and on how class members
will benefit from the settlement. See MCL 2d § 30.45 at 243-44; 2
NEWBERG & CONTE § 11.09 at 11-13. Without the benefit of more
extensive discovery, both sides may underestimate the strength of
the plaintiffs' claims.
Turning to the question of due process rights, we note
that class members may, as a result of these information
deficiencies, not be in a fair position at this early stage to
evaluate whether or not the settlement represents a superior
alternative to litigating. Perhaps more troubling in light of
the reality that absentees tend to lack a real understanding of
the actions supposedly pursued in their names is that, "where
notice of the class action is . . . sent simultaneously with the
notice of the settlement itself, [the settlement class paradigm],
the class members are presented with what looks like a fait
accompli." Mars Steel, 834 F.2d at 680-81. Thus, even if they
have enough information to conclude the settlement is
insufficient and unsatisfactory, see In re Beef Antitrust Litig.,
607 F.2d 167, 173 n.4 (5th Cir. 1979), cert. denied, 452 U.S. 905
(1981), the mere presentation of the settlement notice with the
class notice may pressure even skeptical class members to accept
the settlement out of the belief that, unless they are willing to
litigate their claims individually -- often economically
infeasible -- they really have no choice.
In a different vein, a number of cases have also
criticized settlement classes on the grounds that they create an
opportunity for "one-way intervention," allowing putative class
members to wait to see whether they think the settlement is
favorable before deciding whether they want to be bound by it.
See McDonald v. Chicago Milwaukee Corp., 565 F.2d 416, 420 (7th
Cir. 1977); Watkins v. Blinzinger, 789 F.2d 474, 475 n.3 (7th
Cir. 1986) ("A deferred ruling [on certification] converts the
class action to an opportunity for one-way intervention, which
Rule 23 is designed to avoid. . . ."); Premier Electrical Constr.
Co. v. National Electrical Contractors Ass'n, Inc., 814 F.2d 358,
363 (7th Cir. 1987) (criticizing delay of certification).
Because class members have the opportunity to wait until the
outcome is known (i.e., the settlement's terms are determined) to
decide whether they want to be bound by the result, courts and
defendants are exposed to the same potential for multiple
lawsuits that class actions are designed to avoid, and the
supposed advantages of settlement classes are largely eroded.
Perhaps more troubling, the possibility of pre-
certification negotiation and settlement may facilitate the
filing of strike suits. Since settlement classes can involve a
settlement achieved either before or after the filing of class
claims, recognition of the settlement class device allows
plaintiffs to file as class actions cases that counsel never
intended to have certified, but instead only to settle the claims
individually. Mars Steel, 834 F.2d 677, 681 (7th Cir. 1984)
("[Plaintiffs will be tempted to add class claims in order to
intimidate the defendant, then delete them by way of
compromise."). Knowing that they would not face judicial
scrutiny if they settle before certification, plaintiffs' lawyers
face no deterrent from attempting to extract larger settlements
by threatening class litigation than they could with the cases
filed individually.
In many respects then, the failings of settlement
classes are a function of the dearth of information available to
judges attempting to scrutinize the settlements in accordance
with their Rule 23(e) duties. Because the issue of certification
is never actively contested, the judge never receives the benefit
of the adversarial process that provides the information needed
to review propriety of the class and the adequacy of settlement.
This problem is exacerbated where the parties agree on a
settlement of the case before the class action is filed, since a
motion for certification and settlement are presented
simultaneously.
Last, but by no means least, the use of settlement
classes also risks transforming the courts into mediation forums.
See Coffee, supra note 9 at A15. Cases could be filed without
any expectation or intention of litigation, with the
foreknowledge that the natural hydraulic pressure for settlement
may in fact lead to a class settlement, especially given the
incentive a defendant has to bind as many potential claimants as
possible with an approved class settlement. Courts may approve
these class settlements even if the case is highly inappropriate
for class treatment, since judges confronting the reality of
already over-taxed judicial resources, see Proposed Long Range
Plan for the Federal Courts (March 1995) at 9-12, may feel
constrained to dispose of such onerous litigation through the
settlement class device. The losers in this type of scenario are
not only inadequately represented class members but also the
federal courts as an institution, because their resources are
further sapped by entertaining cases that arguably do not belong
there.10 This increased burden will be especially problematic if
the standards for certification are relaxed for settlement
classes; as this appeal demonstrates, proceedings attendant to
settlement class certification can consume considerable federal
judicial time.
C. Arguments Favoring Settlement Classes
Although settlement classes are vulnerable to potent
criticisms, some important dynamics militate in favor of a
10
. Because the parties do not come before the court until the
action has settled, some courts have even expressed concern that
such cases do not present a case or controversy for Article III
purposes. Cf. Carlough v. Amchem Products, Inc., 834 F. Supp.
1437, 1462-67 (E.D. Pa. 1993).
judge's delaying or even substantially avoiding class
certification determinations. Because certification so
dramatically increases the potential value of the suit to the
plaintiffs and their attorneys as well as the potential liability
of the defendant, the parties will frequently contest
certification vigorously. As a result, a defendant considering a
settlement may resist agreeing to class certification because, if
the settlement negotiations should fail, it would be left exposed
to major litigation. See In re Beef Indus. Antitrust Litig., 607
F.2d 167, 177-78 (5th Cir. 1979) ("[A blanket rule against
settlement classes] may render it virtually impossible for the
parties to compromise class issues and reach a proposed class
settlement before a class certification . . . ."); In re Baldwin
United, 105 F.R.D. 475 (S.D.N.Y. 1984).
In mass tort cases, in particular, use of a settlement
class can help overcome certain elements of these actions that
otherwise can considerably complicate efforts to settle. These
hurdles include "the large number of individual plaintiffs and
lawyers; . . . the existence of unfiled claims by putative
plaintiffs; and . . . the inability of any single plaintiff to
offer the settling defendant reliable indemnity protection
. . . ." Transgrud, 70 CORNELL L. REV. at 835. By using the courts
to overcome some of the collective action problems particularly
acute in mass tort cases, the settlement class device can make
settlement feasible. The use of settlement classes can thus
enable both parties to realize substantial savings in litigation
expenses by compromising the action before formal certification.
See 2 NEWBERG & CONTE § 11.09 at 11-13. Through settlement class
certification, courts have fostered settlement of some very
large, complex cases that might otherwise never have yielded
deserving plaintiffs any substantial renumeration.
Settlement classes also increase the number of actions
that are amenable to settlement by increasing the rewards of a
negotiated solution, in at least four ways. First, the prospect
of class certification increases a defendant's incentive to
settle because the settlement would then bind the class members
and prevent further suits against the defendant. Second,
settlement classes may reduce litigation costs by allowing
defendants to stipulate to class certification without forfeiting
any of their legal arguments against certification should the
negotiations fail. Third, because the payment of settlement
proceeds, even relatively small amounts, may palliate class
members, settlement can reduce differences among class members,
and thus make class certification more likely, increasing the
value of settlement to the defendant, since a larger number of
potential claims can thus be resolved. Fourth, the use of
settlement classes reduces the probability of a successful
subsequent challenge to the class-wide settlement. By treating
the class as valid pending settlement, a temporary class
facilitates notice to those persons whom the court might consider
part of the class. The expanded notice afforded by access to the
customary class action notification process protects both the
absentees and the defendants by eliminating negotiations between
the defendants and the named plaintiffs with respect to the class
definition that could leave the defendant vulnerable to
additional suits by absentees whose interests, a court later
determines, were not adequately served or protected. 2 NEWBERG &
CONTE § 11.27 at 11-40 (citing Midland Mut. Life Ins. Co. v.
Sellers, 101 B.R. 921 (Bankr. S.D. Ohio 1989)). Increasing the
certainty that the settlement will be upheld augments the value
of settling to the defendant and consequently the amount
defendants will be willing to pay. Thus, delaying certification,
in contravention of a strict reading of Rule 23, encourages
settlement, an important judicial policy, by increasing the
prospective gains to the defendant (and thus potentially to the
plaintiffs as well) from exploring a negotiated solution.
Moreover, critics of settlement classes may
underestimate the safeguards that still inhere. Although courts
are often certifying settlement classes with sub-optimal amounts
of information, and without the full benefit of the processes
meant to protect the absentees' interests, the provisional
certification of a settlement class does not finally determine
the absentees' rights. When the simultaneous notice of the class
and the settlement is distributed to the proposed class,
objecting class members can still challenge the class on
commonality, typicality, adequacy of representation, superiority,
and predominance grounds -- they are not limited to objections
based strictly on the settlement's terms. 2 NEWBERG & CONTE §11.27
at 11-40 (citing Midland Mut. Life Ins. Co. v. Sellers, 101 B.R.
at 921).
Furthermore, the view that, in settlement class cases,
the court lacks the information necessary to fufill its role as
protector of the absentees, may reflect an assumption that the
court's approval always comes early in the case. See 2 NEWBERG &
CONTE § 11.27 at 11-43 to 11-44. While it often does, the
certification decision is sometimes made later in the case, when
the parties have presumably developed the merits more fully (in
discovery or in the course of wrangling over the settlement
terms) and when prior governmental procedures or investigations
might have also yielded helpful information. Id. Whatever the
timing of the certification ruling, the judge has the duty of
passing on the fairness and adequacy of the settlement under Rule
23(e) and also of determining whether the class meets the Rule's
requisites under 23(a).11 Whether or not the court certifies the
class before settlement discussions, these duties are the same.
2 NEWBERG & CONTE § 11.27, at 11-46.
Although a judge cannot presume that the putative class
counsel actively represented the absentees' interests, the court
11
. We are somewhat dubious of the court's ability to discharge
its duties completely under these circumstances. See Part IVE
infra.
can still monitor the negotiation process itself to assure that
both counsel and the settlement adequately vindicate the
absentees' interests. Thus, there is no reason to inflexibly
limit the use of settlement classes to any specified categories
of cases (for example, those cases with few objectors, those
which do not involve partial settlements,12 or those which do not
involve an expanded class). Even apparently troublesome
litigation activity, such as expanding the class just before
settlement approval at the defendant's request, is no more free
from judicial scrutiny in a settlement class context than it
would be otherwise. The court still must give notice to the now-
expanded class and satisfy itself that the requisites of class
certification are met. Id. at 11-49. Since the party advocating
certification bears the burden of proving appropriateness of
class treatment, David v. Romney, 490 F.2d 1360 (3d Cir. 1974),
where the procedural posture is such that the court lacks
adequate information to make those determinations, it can and
should withhold the relevant approvals. 2 NEWBERG & CONTE § 11.27
at 11-46.
But even if the use of settlement classes did reduce a
judge's capacity to safeguard the class's interests, it does not
necessarily impair the ability of absentees to protect their own
12
. MCL 2d expressed concern about partial settlements
(settlements only as to certain plaintiffs or certain defendants)
since "[m]embers of the settlement class will almost certainly
find it difficult to understand their position in the
litigation." MCL 2d § 30.45.
interests. Individual class members retain the right to opt out
of the class and settlement, preserving the right to pursue their
own litigation. See Premier Elec. Const. Co. v. N.E.C.A., Inc.,
814 F.2d 358 (7th Cir. 1987) (criticizing settlement classes
because they create opportunities for one-way intervention). In
fact, the use of the settlement class in some sense enhances
plaintiffs' right to opt out. Since the plaintiff is offered the
opportunity to opt out of the class simultaneously with the
opportunity to accept or reject the settlement offer, which is
supposed to be accompanied by all information on settlement, the
plaintiff knows exactly what result he or she sacrifices when
opting out. See 2 NEWBERG & CONTE § 11.27 at 11-51. See In re
Beef Industry Antitrust Litigation, 607 F.2d at 174.
In sum, settlement classes clearly offer substantial
benefits. However, the very flexibility required to achieve
these gains strains the bounds of Rule 23 and comes at the
expense of some of the protections the Rule-writers intended to
construct. As Judge Schwarzer has explained:
one way to see [the settlement class] is as a
commendable example of the law's adaptability to meet
the needs of the time -- in the best tradition of the
Anglo-American common law. But another interpretation
might be that it is an unprincipled subversion of the
Federal Rules of Civil Procedure. True, if it is a
subversion, it is done with good intentions to help
courts cope with burgeoning dockets, to enable
claimants at the end of the line of litigants to
recover compensation, and to allow defendants to manage
the staggering liabilities many face. But as
experience seems to show, good intentions are not
always enough to ensure that all relevant private and
public interests are protected. The siren song of Rule
23 can lead lawyers, parties and courts into rough
waters where their ethical compass offers only
uncertain guidance.
William W. Schwarzer, Settlement of Mass Tort Class Actions:
Order Out of Chaos, CORNELL L. REV. (forthcoming).
D. Are Settlement Classes Cognizable Under Rule 23?
Although not specifically authorized by Rule 23,
settlement classes are not specifically precluded by it either;
indeed, Judge Brieant has read subsection (d), giving the court
power to manage the class action, as authorizing the creation of
"tentative", "provisional", or "conditional" classes through its
grant of power to modify or decertify classes as necessary.
See, e.g., In re Baldwin-United Corp., 105 F.R.D. 475, 478-79
(S.D.N.Y. 1984). And because of the broad grant of authority in
Rule 23(d), at least one commentator has noted that the validity
of temporary settlement classes is usually not questioned. 2
NEWBERG & CONTE §11.22 at 11-31. Courts apparently share this
confidence. Indeed, one court believed that "[i]t is clear that
the Court may provisionally certify the Class for settlement
purposes." South Carolina Nat'l Bank v. Stone, 749 F. Supp. 1419,
(D.S.C. 1990).
We believe that the "provisional"13 or "conditional"14
conception of the settlement class device finds at least a
colorable textual basis in the Rule. Rule 23(d) enables a court
to certify a class, if it complies with its duty to assure that
the class meets the rule's requisites by making appropriate Rule
23 findings (see Part IV(E) infra). Some courts appear to have
concluded that the built-in flexibility of the Rule, which
enables the court to revisit the requisites and modify or
decertify the class should its nature change dramatically during
the negotiation process, renders it acceptable to determine class
status after settlement and thus avoid scrutinizing and
adjudicating class status at an earlier stage when the outcome is
unknown. See, e.g., In re Baldwin-United, 105 F.R.D. at 483; In
re Beef Antitrust Litig., 607 F.2d at 177 ("[T]he Court finds
that a conditional class should be certified for the purpose of
considering the proposed settlements.")
Alternatively, some courts have conceived of settlement
classes as a "temporary assumption" by the court to facilitate
settlement. See Mars Steel, 834 F.2d at 680; In re Beef Indust.
13
. The terms "tentative" and "provisional" appear to be used
interchangeably.
14
. "Conditional" is actually a term that can be properly
applied to all class actions, even those that are certified in
the normal process. Under Rule 23(c)(1), the court retains the
authority to re-define or decertify the class until the entry of
final judgment on the merits. This capacity renders all
certification orders conditional until the entry of judgment.
See MCL 2d § 30.18.
Antitrust Litig., 607 F.2d at 177; 2 NEWBERG & CONTE § 11.27 at 11-
50. The arguments of the late Herbert Newberg, one of the
leading advocates of settlement classes, reflect an assumption
that the Rule 23 determinations are merely postponed, not
eliminated:
On analysis, however, it would appear that this
argument [that courts using settlement classes
circumvent the need to test the propriety of the class
action according to the specific criteria of Rule 23]
may be rebutted by perceiving the temporary settlement
class as nothing more than a tentative assumption
indulged in by the court . . . . The actual class
ruling is deferred in these circumstances until after
hearing on the settlement approval . . . . At that
time, the court in fact applies the class action
requirements to determine whether the action should be
maintained as a class action . . . .
2 NEWBERG & CONTE § 11.27 at 11-50.15 Newberg posits, therefore,
that the temporary assumption conception of the settlement needs
no special authorization since the court eventually follows the
ordinary certification process, only deferring it until the
settlement approval stage.
Courts have also relied on the more general policies of
Rule 23 -- promoting justice and realizing judicial efficiencies
-- to justify this arguable departure from the rule.
15
. See also In re Mid-Atlantic Toyota Antitrust Litig., 564 F.
Supp. 1379, 1388 n.13 (D. Md. 1983) ("Completely ancillary to the
proposed settlement, [a temporary settlement class] lasts only as
long as the period betwen the preliminary approval of the
settlement and the court's final determination on the settlement.
In effect, a temporary settlement class serves only as a
procedural vehicle for providing notice to putative members of a
proposed class . . . .").
[T]he hallmark of Rule 23 is flexibility . . . .
Temporary settlement classes have proved to be quite
useful in resolving major class action disputes. While
their use may still be controversial, most Courts have
recognized their utility and have authorized the
parties to compromise their differences, including
class action issues through this means.
Weinberger, 698 F.2d at 72-73. One commentator found implicit
authorization for settlement classes under a settlement-oriented
interpetation of Rule 23:
[Rule 23] provides that a court may certify a common
question class action when it will prove "superior to
other available methods for the fair and efficient
adjudication of the controversy." A judicially
supervised and approved class action settlement, like a
judicially supervised trial, is a means of hearing and
determining judicially, in other words "adjudicating,"
the value of claims arising from a mass tort. As a
result, if conditional certification of the case as a
common question class action for settlement purposes
would enhance the prospects for a group settlement,
then Rule 23 authorizes certification.
Roger H. Transgrud, Joinder Alternatives in Mass Tort Litig., 70
CORNELL L. REV. 779, 835 (1985) (footnotes ommited).
It is noteworthy that resistance to more flexible
applications of Rule 23 has diminished over time. See In re
Taxable Mun. Bond Secur. Litig., 1994 WL 643143, *4 (E.D. La.
1994) (commenting upon this trend). The evolution of the
reception accorded settlement classes has manifested itself in
the successive versions of the Manual for Complex Litigation.
The first edition of the Manual criticized the initiation of
settlement negotiations before certification, and discouraged all
such negotiations. See MCL 1st § 1.46. The second edition
recognizes the potential benefits of settlement classes but still
cautioned that "the court should be wary of presenting the
settlement to the class." MCL §30.45 at 243. The (draft) third
version acknowledges that "[s]ettlement classes offer a commonly
used vehicle for the settlement of complex litigation" and aims
only to supervise rather than discourage their use. See MCL §
30.45 at 192.
A survey of the caselaw confirms the impression that
resistance to settlement classes has diminished: few cases since
the late 1970's and early 1980's even bother to squarely address
the propriety of settlement classes. Moreover, no court of
appeals that has had the opportunity to comment on the propriety
of settlement classes has held that they constitute a per se
violation of Rule 23. See, e.g., Ace Heating & Plumbing Co. v.
Crane Co., 453 F.2d 30, 33 (3d Cir. 1971) (finding no prohibition
but granting absentees standing to appeal settlement approval);
Marshall v. Holiday Magic, Inc., 550 F.2d 1173, 1176 (9th Cir.
1977) (describing how court approved combined notice of the
pendency of the class and the terms of the proposed settlement);
In re Beef Antitrust Litig., 607 F.2d 167 (5th Cir. 1979);
Corrugated Container Antitrust Litig., 643 F.2d 195, 223 (5th
Cir. 1981) (upholding settlement despite pre-certification
negotiations with some defendants); Weinberger v. Kendrick, 698
F.2d 61 (2d Cir. 1982); Mars Steel, 834 F.2d 677, 681 (7th Cir.
1987) (criticizing settlement classes but ultimately approving
settlement). But some courts recognize that this practice
represents a significant departure from the usual Rule 23
scenario and thereby counsel that courts should scrutinize these
settlements even more closely.
We acknowledge that settlement classes, conceived of
either as provisional or conditional certifications, represent a
practical construction of the class action rule. Such
construction affords considerable economies to both the litigants
and the judiciary and is also fully consistent with the
flexibility integral to Rule 23. A number of other jurisdictions
have already accepted settlement classes as a reasonable
interpretation of Rule 23 and thereby achieved these substantial
benefits. Although we appreciate the concerns raised about the
device, we are confident that they can be addressed by the
rigorous applications of the Rule 23 requisites by the courts at
the approval stages, as we discuss at greater length herein. For
these reasons, we hold that settlement classes are cognizable
under Rule 23.
E. Are the Rule 23(a) and (b) Findings Required for
Settlement Classes? Does Finding the Settlement
to Be Fair and Reasonable Serve as a Surrogate for the Findings?
There is no explicit requirement in Rule 23 that the
district judge make a formal finding that the requisites of the
rule have been met in order to certify a class. However, most
district judges have routinely done so, assuming that it was
required, and in published opinions, a number of courts have
endorsed or at least acknowledged the compelling policy reasons
for doing so. See, e.g., Eisenberg v. Gagnon, 766 F.2d 770, 785
(3d Cir. 1985); Plummer, 668 F.2d at 659; Interpace Corp. v.
Philadelphia, 438 F.2d 401, 404 (3d Cir. 1971); MCL 2d § 30.13
("The judge should enter findings and conclusions after the
hearing, addressing each of the applicable requirements of Rule
23(a) and (b)."). For example, where there has been some dispute
over certification, a court should give the litigants,
particularly the absentees, some statement of the reasons for its
decision. Eisenberg, 766 F.2d at 785. Articulated findings also
simplify the review of complex cases generally. Id. With
respect to settlement classes, we hold that courts must make the
findings because the legitimacy of settlement classes depends
upon fidelity to the fundaments of Rule 23.16
Inasmuch as collusion, inadequate prosecution and
attorney inexperience are the paramount concerns in pre-
certification settlements, see Malchman, 706 F.2d at 433; Beef,
607 F.2d at 174, the need for the adequacy of representation
finding is particularly acute in settlement class situations,
given the inquiry's purpose of detecting cases where there is a
"likelihood that the litigants are involved in a collusive suit
16
. This conclusion is supported by the text of Rule 23(e).
That section provides that "class action" may not be compromised
without court approval, and arguably a case is not a "class
action" in the absence of such findings.
. . . ." Eisen v. Carlisle & Jacquelin, 391 F.2d 555, 562 (2d
Cir. 1968).
There appears to be no authority contra this practice.
Indeed, the courts and commentators that have endorsed settlement
classes have seemed to assume that the approving court made the
requisite class determinations at some point. For example,
Newberg's argument rebutting the charge that the "tentative
assumption" of class status by the court to foster settlement
evades the Rule's strictures continues:
The actual class ruling is deferred in these
circumstances until after [the] hearing on the
settlement approval, following notice to the class. At
that time, the court in fact applies the class action
requirements to determine whether the action should be
maintained as a class action . . . .
2 NEWBERG & CONTE § 11.27 11-50. See also Whitford v. First
Nationwide Bk., 147 F.R.D. 135, 142 (WD Ky. 1992) (disregarding
even the possibility that these classes would not have to meet
all of the normal certification requisites). Even the cases
where the courts did not recognize a need to make the
determinations demonstrate a heightened concern for fairness and
a more cautious approach to settlement approval. See Ace Heating
& Plumbing Co. v. Crane Co., 453 F.2d 30, 33 (3d Cir. 1971)
(court must be doubly careful where negotiation occurs before
certification and designation of a class counsel); Mars Steel,
834 F.2d at 681 (applying a higher standard of fairness); Simer
v. Rios, 661 F.2d 655, 664-66 (7th Cir. 1981) (requiring a higher
demonstration of fairness); Weinberger v. Kendrick, 698 F.2d 61,
69 (2d Cir. 1982) (emphasizing the extensive discovery and
ability and experience of counsel).
Some courts have certified settlement classes "without
articulating or consciously applying Rule 23 tests." 2 NEWBERG &
CONTE § 11.27 at 11-52. See, e.g., Mars Steel, 834 F.2d at 681
(suggesting that the certification procedure may not be
necessary to combat the potential for abuse created by the use of
settlement classes since that potential is "held in check by the
requirement that the judge determine the fairness of the
settlement . . ."); Weinberger v. Kendrick, 698 F.2d at 73
(determination that proposed settlement is fair, reasonable and
adequate substitutes for Rule 23 findings); In re Beef Antitrust
Litig., 607 F.2d 167, 177 (5th Cir. 1979); City of Detroit v.
Grinnell, 495 F.2d 448, 464-65 (2d Cir. 1974) (rejecting
contention that the court erred when it approved a settlement and
acquiesced in the settlement's assumption of the existence of a
proper class). Some courts neglecting the findings have taken
the view that the notice of proposed settlement, which must be
preliminarily approved by the court, "carries the necessary
implication that the action complies with Rule 23." Beef, 607
F.2d at 177.
We disagree both with this suggestion and with the
conclusion that a fairness determination is a surrogate for Rule
23 findings.17 Even if we set aside the problem of the court's
inadequate information, the inquiry into the settlement's
fairness cannot conceptually replace the inquiry into the
propriety of class certification. Normally, a court makes the
required commonality and typicality determinations by referencing
the original class complaints in order to assure that the claims
alleged by the named plaintiffs are common to the class (although
the class need not share every claim in common, Hassine v.
Jeffes, 846 F.2d 169, 177-78 (3d Cir. 1988)), and that the claims
alleged by the named plaintiff occupy approximately the same
position of centrality to the named plaintiffs as they do to the
rest of the class. Weiss v. York Hosp., 745 F.2d 786, 810 (3d
Cir. 1984), cert. denied, 470 U.S. 1060 (1985). Neither the
existence of a settlement nor the terms of settlement affect the
nature of this important inquiry.
The Rule 23(a) class inquiries (numerosity,
commonality, typicality, and adequacy of representation)
constitute a multipart attempt to safeguard the due process
rights of absentees. Thus, the ultimate focus falls on the
17
. We note in this regard that other courts have made the
determinations of adequacy of representation and homogeneity of
the class when evaluating the fairness of the settlement for the
express purpose of assuring that they possess enough information
to execute their Rule 23(e) duty. See In re Beef Industry
Antitrust Litig., 607 F.2d at 173 n.4 (quoting ARTHUR R. MILLER, AN
OVERVIEW OF FEDERAL CLASS ACTIONS: PAST, PRESENT AND FUTURE (Federal
Judicial Ctr. 1977)); see also In re Baldwin-United Corp., 105
F.R.D. 475, 483 (S.D. N.Y. 1984) (making findings in the opinion
which preliminarily approved the settlement).
appropriateness of the class device to assert and vindicate class
interests. Conversely, however, the process of negotiation does
not reveal anything about commonality and typicality. One might
argue that these requisites are merely means to the end of
vindicated rights, and that observing the process of negotiation
could demonstrate adequate vindication -- the true aim of the
Rule. In our view, a court cannot infer that the rights of the
entire class were vindicated without having assured that
commonality and typicality were satisfied.
The 23(b)(3) determination is also important in the
regulatory scheme. To be certified as a (b)(3) class, the judge
must determine that "questions of law or fact common to the
members of the class predominate over any questions affecting
only individual members and that a class action is superior to
other available methods for the fair and efficient adjudication
of the controversy." FED. R. CIV. P. 23(b)(3).18 But the
settlement approval inquiry is far different from the
certification inquiry. In settlement situations, the superiority
requirement arguably translates into the question whether the
settlement is a more desirable outcome for the class than
individualized litigation, and may assure that the settlement
has not grossly undervalued plaintiffs' interests. But even if
18
. As the case before us involves a damages class under Rule
23(b)(3), we do not address the application of the (b)(1) and
(b)(2) requisites which, without the important right to opt out,
involve different considerations.
this is so, a point we neither concede nor decide, there remains
the concern about conflicts between those appointed to represent
class interests -- the lawyers and named plaintiffs -- and the
rest of the class. These concerns, particularly acute with
settlement classes, concentrate the focus of the certification
inquiries on the representational elements.
Certainly, evaluating the settlement can yield some
information relevant to the adequacy of representation
determination under 23(a)(4). The settlement evaluation involves
two types of evidence: a substantive inquiry into the terms of
the settlement relative to the likely rewards of litigation, see
Weinberger, 698 F.2d at 73; Protective Comm. for Indep.
Stockholders v. Anderson, 390 U.S. 414, 424, 88 S. Ct. 1157, 1163
(1968), and a procedural inquiry into the negotiation process.
The focus on the negotiation process results from the realization
that a judge cannot really make a substantive judgment on the
issues in the case without conducting some sort of trial on the
merits, exactly what the settlement is intended to avoid. See
Malchman v. Davis, 706 F.2d at 433. Instead, the court
determines whether negotiations were conducted at arms' length by
experienced counsel after adequate discovery, in which case there
is a presumption that the results of the process adequately
vindicate the interests of the absentees. Weinberger, 698 F.2d
at 74; City of Detroit v. Grinnell, 495 F.2d at 463; Baldwin-
United, 105 F.R.D. at 482 ("In order to supplement judicial
examination of the substance of a compromise agreement, and
because a court cannot conduct a trial in order to avoid a trial,
attention must be paid to the process by which a settlement has
been reached.").
Although the procedural focus on the fairness
determination yields information pertinent to the adequacy of
representation inquiry, it cannot fully satisfy the inquiry.
That is because reliance on the negotiation process used to
approve the settlement to satisfy the class certification
requirements puts excessive pressure on the settlement approved
determinations, and, more fundamentally, such a reliance may be
circular. Cf. NEWBERG & CONTE § 11.28 at 11-54 (suggesting a
greater need for a court to carefully articulate if reasons for
settlement approval where the class was not separately
certified).
Courts approving settlements have examined the
negotiating process in light of the "experience of counsel, the
vigor with which the case was prosecuted, and the coercion or
collusion that may have marred the negotiations themselves."
Malchman v. Davis, 706 F.2d 426, 433 (2d Cir. 1983) (citing
Weinberger, 698 F.2d at 73; Grinnell, 495 F.2d at 465.). Some of
these courts have suggested that the fact that vigorous, arm's
length negotiations occurred should allay concerns about adequacy
of representation. But these inferences depend on the implicit
assumption that the lawyers actually negotiating really were
doing so on behalf of the entire class, see 2 NEWBERG & CONTE §
11.28 at 11-59, assumptions which are clearly unjustified in a
context where the potential for intra-class conflict further
emperils the class's representation. Far too much turns on the
adequacy of representation to accept it on blind faith.
Without determining that the class actually was
adequately represented, the district judge has no real basis for
assuming that the negotiations satisfactorily vindicated the
interests of all the absentees. The focus on the negotiation
process also cannot address the part of the adequacy of
representation inquiry intended to detect situations where the
named plaintiffs are unsuitable representatives of the absentees'
claims. To state that class members were united in the interest
of maximizing over-all recovery begs the question. Although that
observation might allay some concern about a conflict between the
attorney and the class, a judge must focus on the settlement's
distribution terms (or those sought) to detect situations where
some class members' interests diverge from those of others in the
class. For example, a settlement that offers considerably more
value to one class of plaintiffs than to another may be trading
the claims of the latter group away in order to enrich the former
group.
In short, the prophylactic devices used by judges to
approve these pre-certification settlements without ever formally
certifying the class fail to satisfy the requirements of Rule 23.
Without determining that the class claims are common and typical
of the entire putative class and that the class representatives
and their counsel are adequate representatives, we have no
assurance that the district court fully appreciated the scope and
nature of the interests at stake.19 Finally, we note that courts
adopting the view that the formal class determinations are not
necessary for settlement classes may be contravening not only the
language of the rule but also the Supreme Court's requirement in
General Telephone Co. of Southwest v. Falcon, 457 U.S. 147, 160,
102 S. Ct. 2364, 2372 (1982) (disapproving the trial court's
insufficient scrutiny of the named plaintiff's capacity to
adequately represent the class), that "[a]ctual, not presumed,
conformance with Rule 23(a) remains, however, indispensable."
Thus, while we approve the provisional certification of a
19
. In Malchman v. Davis, 706 F.2d at 433, the court was
satisfied by the district court's determination that the
settlement class satisfied the adequacy of representation inquiry
noting: "There is no doubt that the district court must make an
independent evaluation of whether the named plaintiffs were
adequate representatives of the class . . . . A judge has an
obligation to consider whether the interest of the class are
adequately represented." (citing East Texas Motor Freight Sys.,
Inc. v. Rodriguez, 431 U.S. 395, 403-06, 97 S. Ct. 189, 96-98
(1977)); see also Plummer, 668 F.2d at 659 & n.4. We agree that
this is an appropriate focus given the heightened potential for
collusion, buy-offs and other abuses in settlement class
situations where the negotiations occur before the court appoints
class representatives and counsel. We still believe, however,
that courts should assure that settlement classes meet all of
the requirements of 23(a) and (b). This prescription is
consistent with the heightened duty of courts in class action
settlements to assure that the absentees' rights are adequately
protected.
settlement class to facilitate settlement discussions, final
settlement approval depends on the finding that the class met all
the requisites of Rule 23.
F. Can There be a Valid Settlement Class That
Would Not Serve as a Valid Litigation Class?
As we have previously explained, courts using the
settlement class device must at some point definitively certify
the class and satisfy themselves that the requisites of Rule 23
have been satisfied. To avoid that process entirely would
dismantle the rule's carefully constructed mechanism that serves
to protect absentees' due process rights. Moreover, despite some
courts' suggestions that the standards are less rigorous for
settlement classes, we do not believe that Rule 23 authorizes
separate, liberalized criteria for settlement classes.
At the outset we note that, while some other courts
have nominally complied with the rule, they appear to have
assumed that lower standards apply in settlement class cases.
See Officers for Justice v. Civil Serv. Comm'n of San Francisco,
688 F.2d 615, 633 (9th Cir. 1982), cert. denied, 459 U.S. 1217,
103 S. Ct. 1219 (1983) ("[C]ertification issues raised by class
action litigation that is resolved short of a decision on the
merits must be viewed in a different light."); Fisher Bros. v.
Phelps Dodge Indus. Inc., 604 F. Supp. 446, 450 (E.D. Pa. 1985);
In re Dennis Greenman Securities Litig., 829 F.2d 1539, 1543
(11th Cir. 1987) ("In reviewing settlement certifications, a
special standard has been employed."); A.H. Robins, 880 F.2d at
740 (in deciding whether to certify a class, settlement is at
least an important factor in favor and might even be a per se
ground for certification); Manual.2d at §30.45. Other courts
have stated that settlement reduces the potential conflicts among
the class and thus enhances the likelihood of meeting the
criteria, presumably the same criteria a litigation class must
satisfy. See, e.g., Bowling v. Pfhizer, Inc., 143 F.R.D. 141,
159 (S.D. Oh. 1992). Newberg is of this view. See 2 NEWBERG &
CONTE §11.28, at 11-58.
According to Newberg, though settlement does not impact
the numerosity requirement it may indeed increase the likelihood
of meeting the commonality and typicality inquiries. "Typicality
of claims in a settlement class context requires proof that the
interests of the class representative and the class are commonly
held for the purposes of receiving similar or overlapping
benefits from a settlement." 2 NEWBERG & CONTE §11.28 at 11-58.
On this theory, because the court has delayed the findings until
the outcome of the litigation (i.e., the settlement agreement) is
known, the judge conducts the inquiry based on the relative
rewards to the class members rather than based on the various
legal claims of class members. So long as all plaintiffs get
similar benefits from the settlement, irrespective of the
different strengths of their initial claims, the commonality and
typicality inquiries are viewed as likely to be satisfied.
Under this approach, the adequate representation
inquiry is also simplified in the settlement class context by a
result-oriented approach toward the class requirement findings.
Rather than asking whether the lawyers have sufficient resources
and skills to prosecute the action (as would be the case with
customary class certification procedures), courts, it is said,
need only determine, in hindsight, whether the settlement was
negotiated at arms' length, and whether the negotiations were
long, thorough and deliberative. See In re Corrugated Container
Antitrust Litig., 643 F.2d 195, 212 (5th Cir. 1981) (adequacy
judged by sufficiency of settlement); In re Domestic Air Transp.
Antitrust Litig., 148 F.R.D. 297, 341 (N.D. Ga. 1993)
(inequitable distribution). Courts adopting this approach
require proof only that named plaintiffs' and class interests are
not antagonistic. See, e.g., Goodman v. Lukens Steel Co., 777
F.2d 113, 123 (3d Cir. 1985) (relying on absence of conflict to
find adequate representation); Lewis v. Curtis, 671 F.2d 779, 788
(3d Cir. 1982) (finding named plaintiff an adequate
representative despite small stake in litigation and ignorance of
facts and claims); Steiner v. Equimark Corp., 96 F.R.D. 603, 610
(W.D. Pa. 1983) ("The key question [for the adequacy of
representation inquiry] is whether their interests are
antagonistic."). In these cases, courts have effectively relied
on the settlement's terms -- the outcome of the action -- to find
the required absence of antagonism.20
We disagree with this approach, championed primarily by
Newberg. There is no language in the rule that can be read to
authorize separate, liberalized criteria for settlement
classes.21 Although we acknowledge the need for flexible
interpretation of Rule 23 to enable it to achieve its broader
purposes of vindicating difficult individual claims and
conserving judicial resources, see Beef, 607 F.2d at 177-78
(discussing the policy needs for flexibility); Ace Heating, 453
F.2d at 33 (recognizing need to give small claimants who did not
20
. For example, in finding adequate representation, one court
noted: "[S]o long as all class members are united in asserting a
common right, such as achieving the maximum possible recovery for
the class, the class interests are not antagonistic for
representation purposes." In re Corrugated Container Antitrust
Litig., 1980-1 Trade Cas. (CCH) ¶63, 163 at 77,788 n. 10 (S.D.
Tex. 1979), aff'd, 643 F.2d 195 (5th Cir. 1981) (citing WRIGHT &
MILLER, FED. PRACTICE & PROCEDURE CIVIL § 1768, at nn.7 & 8).
21
. Indeed, if any difference in standards is warranted, pre-
certification settlement may raise the adequacy of representation
standard. Since this inquiry must ascertain "whether there has
been any collusion or undue pressure by the defendants on would
be class representatives," see First Comm. Corp. of Boston
Consumer Accts. Litig., 119 F.R.D. 301, 308 (D. Mass 1987);
Alvarado Partners LP v. Mehta, 723 F. Supp. 540, 546 (D. Colo.
1989), it must carry greater weight in the settlement class
context where there is an enhanced potential for those evils.
Thus, while the other 23(a) findings remain important when the
action settles, the need to assure an absence of collusion and an
alignment of interests assumes an especially crucial role.
Reliance, for the class requisites analysis, on the settlement's
terms and process also increases the importance of an independent
conclusion of adequate representation (i.e., one not derived
solely by reference to the nature of the negotiations).
opt out the right to appeal a settlement approval), we emphasize
that Rule 23 is designed to assure that courts will identify the
common interests of class members and evaluate the named
plaintiff's and counsel's ability to fairly and adequately
protect class interests. See Katz v. Carte Blanche Corp., 496
F.2d 747, 757 (3d Cir. 1974). Thus, actions certified as
settlement classes must meet the same requirements under Rule 23
as litigation classes. To allow lower standards for the
requisites of the rule in the face of the hydraulic pressures
confronted by courts adjudicating very large and complex actions
would erode the protection afforded by the rule almost entirely.
Judge Posner has explained the animating concern behind
this strict application. "The danger of a premature, even a
collusive, settlement is increased when as in this case the
status of the action as a class action is not determined until a
settlement has been negotiated, with all the momentum that a
settlement agreement generates . . . ." Mars, 834 F.2d at 680.
The foregoing discussion has focused on adequacy of
representation, but the presence of commonality and typicality
are equally important to the class action regime. Certifying a
class without the existence of questions common to the class (or
where the class representatives' claims are not typical) perverts
the class action process and converts a federal court into a
mediation forum for cases that belong elsewhere, usually in state
court. On the other hand, the cases that make the settlement
class device appear most useful are cases presenting the most
unwieldy substantive and procedural issues, i.e., those diversity
cases in which plaintiffs from many states are confronted with
differing defenses, differing statutes of limitations, etc. --
precisely those cases that stretch the Rule to its outer-most
limits.
This is a troublesome issue -- and a close one. Many
mass tort actions have this problem. The School Asbestos cases
and the Breast Implant cases had it, and this case does, as well.
It may initially seem difficult to envision an actual trial of
these cases because of the differing defenses certain to be
raised under the various bodies of governing law. While the
problem may be overstated,22 settlement classes still serve the
useful purpose of ridding the courts -- state and federal -- of
this albatross even though the case may never have been triable
in class form. But if that were the primary function of the
settlement class, the federal courts would have become a
mediation forum, a result inconsistent with their mission and
limited resources. In sum, "a class is a class is a class," and
a settlement class, if it is to qualify under Rule 23, must meet
22
. In the School Asbestos case, 789 F.2d at 996, the panel
asked counsel to analyze all the claims and defenses and write a
report reflecting whether the differing claims and defenses
evidence a small number of patterns that would be amenable to
trial through a series of special verdicts. The plaintiffs came
up with a demonstration that the claims and defenses were
reducible to four patterns. That, in our view, was sufficient to
satisfy the commonality and typicality inquiries. The same might
be true in this case.
all of its requirements. The district court should keep these
matters in mind on remand.
V. IS THE SETTLEMENT CLASS PROPER HERE?
A. Were There Adequate Findings Under Rule 23(a)?
Certain of the objectors in this case contend that the
district court committed plain error by never actually certifying
the class as required by Rule 23. See Brief of French Objectors
at 18. This, of course, would be a serious error, since without
certification there is no class action, and "[i]n a settlement
entered without class certification the judgment will not have
res judicata effect on the claims of absent class members."
Simer v. Rios, 661 F.2d 655, 664 (7th Cir. 1981).
The district court certified the class provisionally in
a pre-trial order. See Pretrial Order No. 7. We have already
noted that provisional certification constitutes an acceptable
means of facilitating settlement negotiations. See 2 NEWBERG &
CONTE §11.27 at 55-56. It appears that the court believed that
it certified the class by "confirming" the provisional
certification in its order approving the settlement. (JA 1708,
1745.) However, the court did not make the findings we hold that
Rule 23 requires, not even upon approving the settlement.
Because we hold today that courts employing settlement classes
must still make findings that the class complies with Rule 23(a)
and the appropriate parts of Rule 23(b), the court's failure to
comply with the rule in this respect is a plain error of law, and
hence an abuse of discretion, requiring that the certification be
set aside.
Our conclusion that the settlement class was not
properly certified does not mean that the class could not be
certified on remand. Accordingly, we must consider whether the
existing record is adequate to support class certification, or
whether further record development is required.
B. Could the Class Requisites Have Been Met
On The Current Record?
1. Numerosity, Commonality, and Typicality
As we have explained, a class action -- whether
certified for settlement or litigation purposes -- must meet the
class requisites enunciated in Rule 23. The district court did
not make findings on these issues. The numerosity requirement of
Rule 23(a) is plainly satisfied in this action encompassing
nearly six million truck owners. The commonality and typicality
inquiries of 23(a), however, raise substantial concerns about the
sufficiency of this class. The record currently lacks the facts
needed to establish these requisites, and the defendants also
ardently maintain that the applicability of different defenses to
different groups of plaintiffs would prevent the class from
satisfying the commonality and typicality requirements. At this
juncture, we leave open the possibility that, on remand, the
district court may indeed find facts sufficient to support these
elements.
2. Adequacy of Representation
a. The Situation of the Fleet Owners
This settlement class appears to fail to meet Rule
23(a)'s adequacy of representation test. The adequacy of
representation inquiry has two components intended to assure that
the absentees' interests are fully pursued: it considers whether
the named plaintiffs' interests are sufficiently aligned with the
absentees, and it tests the qualifications of the counsel to
represent the class. See Weiss v. York Hospital, 745 F.2d 786,
811 (3d Cir. 1984); 2 NEWBERG & CONTE § 11.28 at 11-58. On the
first prong, we are not satisfied that the interests of various
class members were sufficiently aligned; indeed the settlement
appears to create antagonism within the class. While some courts
have been satisfied that there is no intra-class conflict where
"all class members are united in asserting a common right, such
as achieving the maximum possible recovery for the class," In re
Corrugated Container Antitrust Litig., 1980-1 Trade Cas. (CCH) ¶
63, 163 at 77, 788 n.10 (S.D. Tex. 1979), aff'd. 643 F.2d 195
(5th Cir. 1981), we disapprove such a myopic focus on the
settlement terms.
In this case in particular, the conclusion that the
settlement -- that (supposedly) maximized class recovery --
satisfied the requirement that class members' interests not be
antagonistic ignores the conspicuous evidence of such an intra-
class conflict in the very terms of this settlement. The
substantial impediments to fleet owners using these certificates
creates a conflict between their interests in this settlement and
those of individual owners. (The named plaintiffs are all
individual owners.) Moreover, the dubious value of the transfer
option, see Part VI(A)(1)(c) infra, one of the principal
responses to the fleet owners' objection, does little to reduce
the disparity in the prospective value to the different sections
of the class.
This is not a case where some plaintiffs share the
prospect of a future claim with other class members who currently
have such a claim. The fleet owners will never enjoy the
benefits of the settlement terms, such as the intra-household
transfer option, intended specifically for the benefit of
individual owners. Thus, we must be concerned that individual
owners had no incentive to maximize the recovery of the
government entities; they could skew the terms of the settlement
to their own benefit. Not surprisingly, the settlement leaves
fleet owners with significantly less value than individual
owners. At the very least, the class should have been divided
into sub-classes so that a court examining the settlement could
consider settlement impacts that would be uniform at least within
the sub-classes.
b. Did Counsel Adequately Represent the
Interests of the Entire Class?
The other aspect of the adequacy of representation
test, whether counsel is qualified and serves the interests of
the entire class, also gives us reason to pause. Courts
examining settlement classes have emphasized the special need to
assure that class counsel: (1) possessed adequate experience;
(2) vigorously prosecuted the action; and (3) acted at arms
length from the defendant. See, e.g., Malchman, 706 F.2d at 433;
Alvarado Partners, 723 F. Supp. at 546. The first criterion is
no problem, for these counsel clearly possess the experience and
skills to qualify them to pursue these sorts of actions. But the
second and third points require attention in view of lack of
significant discovery and the the extremely expedited settlement
of questionable value accompanied by an enormous legal fee.
Before addressing the latter points, it is necessary to
begin with some legal theory discussing the structural nature of
fee arrangements in class actions of this type, having in mind
that even honorable counsel -- like class counsel here -- may be
compromised by the possibility of a large fee.
(1) Class Action Attorneys' Fees
Theory and Structure
Beyond their ethical obligations to their clients,
class attorneys, purporting to represent a class, also owe the
entire class a fiduciary duty once the class complaint is filed.
See 2 NEWBERG & CONTE § 11.65 at 11-183; Greenfield v. Villager
Indus., Inc., 483 F.2d 824, 832 (3d. Cir. 1973). The large fees
garnered by some class lawyers can create the impression of an
ethical violation since it may appear that the lawyer has an
economic stake in their clients' case. But class actions cannot
be analyzed in the same framework as conventional bipolar
litigation. Because of the collective action problems associated
with cases where individual claims are relatively small, WRIGHT,
MILLER & KANE, 5 Federal Practice and Procedure § 1754 at 49, and
the social desirability of many class suits (the private
enforcement model), id. at 51; Sprogis v. United Airlines, Inc.
444 F.2d 1194 (7th Cir. 1971), large attorneys' fees serve to
motivate capable counsel to undertake these actions. Thus, large
fee awards standing alone do not suffice to show that the
representation was inadequate or unethical. These allowances
generally reflect the realization that the lawyer represents
numerous individuals with somewhat varying interests, not an
acceptance of the situation where the lawyer's personal interests
trump the interests of the entire class.
Some commentators blame the system of compensating
class action lawyers in a manner that fails to confront fully the
differences between class action litigation and classical bipolar
litigation for creating incentives that diverge markedly and
predictably from their clients' interests. The leading critic is
Professor Coffee. See John C. Coffee, Jr., Understanding the
Plaintiff's Attorney: The Implications of Economic Theory For
Private Enforcement of Law Through Class and Derivative Actions,
86 COLUM. L. REV. 669, 671-72 (1986) (noting that critics "have
argued that the legal rules governing the private attorney
general have created misincentives that unneccessarily frustrate
the utility of private enforcement. These critics have focused
chiefly on the conflicts that arise between the interests of
these attorneys and their clients in class and derivative actions
. . . .") (hereinafter Understanding the Plaintiff's Attorney);
Id. at 677 ("Ultimately, the most persuasive account of why class
actions frequently produce unsatisfactory results is the
hypothesis that such actions are uniquely vulnerable to collusive
settlements that benefit plaintiff's attorneys rather than their
clients."); John C. Coffee, Rescuing the Private Attorney
General: Why the Model of the Lawyer as Bounty Hunter Is Not
Working, 42 MD. L. REV. 215 (1983); John C. Coffee, The Unfaithful
Champion: The Plaintiff as Monitor in Shareholder Litigation, 48
SUM LAW & CONTEM. PROBS., 5 Summer 1985; Kevin M. Clermont & John D.
Currivan, Improving on the Contingent Fee, 63 CORNELL L. REV. 529
(1978); Murray L. Schwartz & Daniel J.B. Mitchell, An Economic
Analysis of the Contingency Fee in Personal-Injury Litigation, 22
STAN. L. REV. 1125 (1970).
Economic models have shown how conventional methods of
calculating class action fee awards give class counsel incentives
to act earlier than their clients would deem optimal. See
Coffee, Understanding the Plaintiff's Attorney, 86 COLUM. L. REV.
at 688. Because, under a percentage of recovery award mechanism,
the attorney will only enjoy a relatively small portion of
whatever incremental award he can extract from the defendant, the
defendant can pressure the plaintiffs' attorney into early
settlement by threatening to expend large sums on dilatory
tactics that would run the expenses up beyond what plaintiffs'
attorneys can expect to profit. Id. at 690. Rather than
presenting a possible solution, the lodestar method seemingly
exacerbates the problem of cheap settlement by divorcing the fee
award from the settlement's size, since plaintiffs' attorneys
have no incentive to take the risk on a trial for potentially
larger award to the class where their own fees will not
necessarily reflect the greater risk taken on trial. See also
id. at 718 (discussing how lodestar method may create structural
collusion).
Coffee also blames the principal-agent problem endemic
to class actions for creating a situation where the defendants
and plaintiffs can collusively settle litigation in a manner that
is adverse to the class's interest: "At its worst, the
settlement process may amount to a covert exchange of a cheap
settlement for a high award of attorney's fees. Although courts
have long recognized this danger and have developed some
procedural safeguards intended to prevent collusive settlements,
these reforms are far from adequate to the task." Id. at 714
n.121 (citing cases). A number of commentators have identified
settlements which afford only nonpecuniary relief to the class as
prime suspects of these cheap settlements. See Coffee,
Understanding The Plaintiff's Attorney, 86 COLUM. L. REV. at 716
n.129; JONATHAN R. MACEY & GEOFFREY P. MILLER, The Plaintiffs'
Attorneys Role in Class Action and Derivative Litigation:
Economic Analysis and Recommendations for Reform, 58 U. CHI. L.
REV. 1, 45 n.10 (1991); Nancy Morawetz, Bargaining, Class
Representation, and Fairness, 54 OHIO ST. L.J. 1, 5 n.40 (1993).
While courts may fail to appreciate adequately the
distinction between conventional bipolar litigation and class
actions in many respects, they may over-emphasize these
differences in other respects. To be sure, courts will be
willing to award fees in class actions that would appear
extraordinary and arguably improper in conventional litigation.
Nevertheless, some of the critiques based on ethical or collusive
concerns remain instructive. Although subsequent versions seem
to avoid a discussion, the Manual for Complex Litigation (First)
acknowledged the potential for attorney-class conflict. It
condemned fees that are paid separate and apart from the
settlement funds paid to the class because amounts "paid by the
defendant(s) are properly part of the settlement funds and should
be known and disclosed at the time the fairness of the settlement
is considered." MCL 1st § 1.46.
One court has noted that the "effect of such an
arrangement [where the counsel fees are not resolved and the
details not included in the class notice] may be to cause counsel
for the plaintiffs to be more interested in the amount to be paid
as fees than in the amount to be paid to the plaintiffs." In re
General Motors Corp. Engine Interchange, 594 F.2d at 1131.
Commentators have also noted how, where there is an absence of
objectors, courts lack the independently-derived information
about the merits to oppose proposed settlements. See Coffee,
Understanding the Plaintiff's Attorney, 86 COLUM. L. REV. at 714
n.131. Of course, by endorsing a practice where the class is,
for practical purposes, deprived of information concerning the
fees, courts foster a situation where there will be fewer
objectors.23
(2) The Stewardship of Counsel Here
A number of factors militate against the conclusion
that the class's interests were sufficiently pursued here.
First, the settlement arguably did not maximize the class
members' interests. Every owner received a coupon whose value
could only be realized by purchasing a new truck. Significant
obstacles existed to the development of a secondary market in the
transfer certificates given that the transfer restrictions and
their limited lifespan minimize the value of the transfer option.
Second, class counsel effected a settlement that would yield very
substantial rewards to them after what, in comparison to the $9.5
million fee, was little work.
23
. The information on fee agreements may prompt potential
objectors to oppose not only the awards but, also, to the extent
they conclude arm's length negotiations were compromised, the
adequacy of the settlement and the propriety of the class.
Third, the fact that the settlement involves only non-
cash relief, which is recognized as a prime indicator of suspect
settlements, increases our sense that the class's interests were
not adequately vindicated. The separate negotiation of the fee
agreement and the failure to disclose the amount of the award in
the class notice only enhance this sense that counsel may have
pursued a deal with the defendants separate from, and perhaps
competing for the defendant's resources with, the deal negotiated
on behalf of the class. And although the degree to which a
settlement hurts a defendant is not ordinarily a measure of the
settlement's adequacy, the fact that this settlement might
actually benefits GM by motivating current owners to buy new
trucks from the company (the settlement may arguably be viewed as
a GM sales promotion device) certainly does little to allay the
concern that the settlement did not advance the interests of the
class as much as it might have.
Fourth, our concern about the vigor of counsels'
prosecution of the class claims, specifically the possibility
that counsel did not do right by the class, is buttressed by the
legacy of Prandini v. National Tea Co., 557 F.2d 1015, 1021 (3d
Cir. 1977). In Prandini, this court recognized the potential for
attorney class conflicts where the fees, while ostensibly
stemming from a separate agreement, were negotiated
simultaneously. We characterized simultaneity of fee and
settlement negotiations as a "situation . . . having, in
practical effect, one fund divided between the attorney and
client." To respond to this danger of collusion between the
class counsel and defendant, Prandini and the Third Circuit Task
Force Report on court awarded attorney's fees disapproved fee
discussions until after the achievement and approval of
settlement. See Prandini, 557 F.2d at 1021; Court Awarded
Attorney's Fees, Report of the Third Circuit Task Force, 108
F.R.D. 238, 266 (1985) [hereinafter Task Force].24
In this case, there were strong indications that such
simultaneous negotiations in fact transpired. Indeed, there was
evidence in a letter from class counsel that at least some
portion of the fees and expenses had to have been negotiated
simultaneously with the settlement. (Butler Letter on fees,
Jenkins app. at 70-1). The court justified its dismissal of the
allegation of simultaneous negotiation by citing (1) a statement
in the letter that the "attorneys' fees were negotiated
separately, after we agreed on everything else," and (2) GM's
24
. Other courts and authorities have followed this guide. See,
e.g., Ashley v. Atlantic Richfield Co., 794 F.2d 128 (3d Cir.
1986); MCL 2d § 30.41; 2 NEWBERG & CONTE § 11.29 at 11-62
(recognizing potential for conflict where settlement and fees to
be paid by defendant simultaneously negotiated). To implement
this prophylactic bar fully, courts would have to require class
counsel to disclose all understandings as to fees, not simply
concluded, formal agreements. See MCL 2d § 34.42 at 237-39.
Although it recognized that this prophylactic rule could impede
some settlements by making it impossible for the defendant to
size up its total liability (i.e. the sum of the settlement
amount and any fees the defendant agrees to pay), Task Force 108
F.R.D. at 267-69, the Task Force concluded that avoiding the
conflicts justified this cost.
reservation of the right to contest any award of fees that it
deemed unreasonable. Even though we assume that these are
factual findings, thus ordinarily deserving deference, we think
these findings were made by reference to an erroneous legal
standard. Indeed, neither of these bases is persuasive,
especially in view of GM's acquiecence in a patently baseless
ground for augmenting the counsel fee, see Part VII infra.
In considering the adequacy of representation, we are
loath to place such dispositive weight on the parties' self-
serving remarks. And even if counsel did not discuss fees until
after they reached a settlement agreement, the statement would
not allay our concern since the Task Force recommended that fee
negotiations be postponed until the settlement was judicially
approved, not merely the date the parties allege to have reached
an agreement. We recognize that Evans v. Jeff D., 475 U.S. 717,
734-38, 106 S. Ct. 1531, 1541-43 (1986), overruled Prandini's
strict rule prohibiting simultaneous negotiations. However, many
of the concerns that motivated the Prandini rule remain, and we
see no reason why Jeff D. or its underlying policy of avoiding
rules that impede settlement preclude us from considering the
timing of fee negotiations as a factor in our review of the
adequacy of the class' representation. Consequently, the
likelihood that the parties did negotiate the fees concurrently
with the settlement in this case increases our concern about the
adequacy of representation.25
Nor would GM's reservation of the right to appeal the
fee award establish that the fee was negotiated separately since
the likelihood that GM would want to contest an award based on a
fee petition to which it agreed is quite small. The fact is
confirmed by GM's "lay down" position with respect to the fee
application. Although the Supreme Court clearly invalidated the
use of mulitipliers in lodestar awards in 1992, see City of
Burlington v. Dague, 112 S. Ct. 2638 (1992), GM did not apprise
the district court of this fact when it was approving the fee
award, or complain when the district court used a mulitplier in
the calculations. This posture of GM suggests that its
reservation of the right to appeal the fee award should not be
given great weight in determining whether the settlement and
attorney's fee were negotiated separately. But we hasten to add
that we have not resolved these factors. We only hold today that
the court did not make the necessary findings, and we remand to
the district court so that it can make the necessary Rule 23
findings.
The thrust of the foregoing discussion is that the
circumstances under which the settlement evolved, made possible
by the settlement class device, may have compromised class
25
. While the parties could have sought a waiver permitting
simultaneous negotiations, Task Force at 269, the parties did not
seek one here.
counsel in a manner raising doubts as to adequacy of
representation. The district court will examine this aspect of
the matter on remand. Perhaps, on a more developed record, the
adequacy of representation will be established. These concerns
underscore the importance of having the district court make Rule
23 findings. Although we do not believe that the class would
meet the requirements for certification on the current record, we
do not preclude the possibility that certification could be
properly supported on a more developed record. Thus, we remand
this action to the district court so that it can re-examine the
class certification and the settlement and, if appropriate,
certify the class by making the findings required by Rules 23(a)
and (b).
VI. IS THE SETTLEMENT FAIR, REASONABLE, AND ADEQUATE?
Invoking the correct standard of review under Girsh v.
Jepson, 521 F.2d 153, 157 (3d Cir. 1975), the objectors also
argue that the district court abused its discretion, when it
approved the settlement as fair, reasonable and adequate.
Because we leave open the possibility that the district court may
on remand properly certify the class pursuant to Part V of this
opinion, we must also address the district court's approval of
the settlement. Rule 23(e) imposes on the trial judge the duty
of protecting absentees, which is executed by the court's
assuring that the settlement represents adequate compensation for
the release of the class claims. See 2 NEWBERG & CONTE § 11.46 at
11-105 to 11-106. Some courts have described their duty under
Rule 23(e) as the "fiduciary responsibility" of ensuring that the
settlement is fair and not a product of collusion. In re Warner
Commun. Secur. Litig., 798 F.2d 35, 37 (2d Cir. 1986); see also,
Plummer v. Chemical Bank, 668 F.2d 654, 658 (2d Cir. 1982);
Grunin v. International House of Pancakes, 513 F.2d 114, 123 (8th
Cir.), cert. denied, 423 U.S. 864 (1975); Alvarado Partners L.P.
v. Mehta, 723 F. Supp. 540, 546 (D. Colo. 1989). At all events,
where the court fails to comply with this duty, absentees have an
action to enjoin the settlement. 2 NEWBERG & CONTE § 11.23.
In order for the determination that the settlement is
fair, reasonable, and adequate "to survive appellate review, the
district court must show it has explored comprehensively all
relevant factors." Malchman, 706 F.2d at 434 (citing Protective
Committee, 390 U.S. at 434; Plummer, 668 F.2d at 659). A number
of courts have recognized the need for a special focus on
precluding the existence of collusion. See Malchman, 706 F.2d at
433 (advocating a focus on the negotiation process to uncover
possible collusion); General Motors Interchange, 594 F.2d at 1125
(finding a need for heightened scrutiny of the settlement
stemming from the potential for collusive settlement).
The topic of class action settlement has received much
attention, which is understandable given the growing frequency of
the settlement of increasingly large claims through the class
action device. See In re A.H. Robins Co., 880 F.2d 709, 739-40
(4th Cir. 1989) (discussing the use of the device to settle
various mass tort cases); In re Taxable Municipal Bond Secur.
Litig., 1994 WL 643142 at *5 (noting the dramatic change in
attitudes of courts and commentators toward the settlement
class). The drive to settle class actions has also grown,
notwithstanding the potential for collusive settlements to
compromise absentee interests. Courts undertaking the special
role of supervising class action settlements are apparently
heeding the public policy in favor of settlement, see 2 NEWBERG &
CONTE § 11.41 at 11-85, and acknowledging the urgency of this
policy in complex actions that consume substantial judicial
resources and present unusually large risks for the litigants.
We have already noted the special difficulties the
court encounters with its duties under Rule 23(e) in approving
settlements where negotiations occur before the court has
certified the class. Because of such difficulties, many courts
have required the parties to make a higher showing of fairness to
sustain these settlements. See, e.g., Ace Heating & Plumbing Co.
v. Crane Co., 453 F.2d 30, 33 (3d Cir. 1971) ("[W]hen the
settlement is not negotiated by a court designated class
representative the court must be doubly careful in evaluating the
fairness of the settlement to the plaintiff's class."); General
Motors Interchange, 594 F.2d at 1125 (attributing a need for
heightened scrutiny of the settlement to the potential for
collusive settlement); Weinberger, 698 F.2d at 73 (higher showing
of fairness required in pre-certification settlements and special
focus on assuring adequate representation and the absence of
collusion); Malcham v. Davis, 706 F.2d 426, 434 (2d Cir. 1983);
Mars Steel v. Continental Ill. Nat'l Bank & Trust, 834 F.2d 677,
681 (7th Cir. 1987); County of Suffolk v. Long Island Lighting
Co., 907 F.2d 1295, 1323 (2d Cir. 1990); 2 NEWBERG & CONTE §
11.23; MCL 2d § 30.42 (citing the informational deficiencies
faced by the court and counsel in pre-certification settlements).
We affirm the need for courts to be even more scrupulous than
usual in approving settlements where no class has yet been
formally certified.
Settlements that have survived this heightened standard
have involved much stronger indications of sustained advocacy by
the de facto class counsel than we observe in this case. See
Weinberger v. Kendrick, 698 F.2d 61 (2d Cir. 1982) (settlement
discussions did not commence until after four years of discovery
supplemented by another investigation by a trustee and after
plaintiffs rejected the first settlement offer); In re Beef
Indus. Antitrust Litig., 607 F.2d at 177-78 (settlement
discussions began after six months of discovery; action pending
for three years, court was fully briefed); City of Detroit v.
Grinnell, 495 F.2d 448, 464 (2d Cir. 1974) (approving settlement
after several counsel vied for position for four years and voiced
strenuous objections, explaining that Manual's concerns about
settlement classes articulated by the Manual for Complex
Litigation only pertained to settlement in the early stages of
litigation); cf. Plummer v. Chemical Nat'l Bank, 668 F.2d 654 (2d
Cir. 1982) (rejecting settlement where plaintiffs' counsel relied
on information voluntarily furnished by defendants).
There are certain basic questions that courts can ask
to detect those cases settled in the absence of sustained effort
by class representatives sufficient to protect the interests of
the absentees. See MCL 2d § 30.41. For instance: Is the relief
afforded by the settlement significantly less than what appears
appropriate in light of the preliminary discovery? Have major
causes of action or types of relief sought in the complaint been
omitted by the settlement? Did the parties achieve the
settlement after little or no discovery? Does it appear that the
parties negotiated simultaneously on attorneys' fees and class
relief? Even acknowledging the possibility of some overpleading,
these questions raise a red flag in this case.
With the courts' heightened duty to scrutinize this
pre-certification settlement and some of these rudimentary
indicators in mind, we now apply our nine-factor Girsh test, see
Part III supra, and conclude from the balance of these factors
that the district court's conclusion that the settlement was fair
and reasonable constitutes an abuse of discretion.
Coincidentally, this result tracks the conclusions of a Texas
appeals court that, based on an analysis similar to that of
Girsh, set aside an order approving a substantially identical
settlement of similar claims brought by residents of Texas. See
Bloyed v. General Motors, 991 S.W.2d at 422.
A. Adequacy of Settlement - General Principles
This inquiry measures the value of the settlement
itself to determine whether the decision to settle represents a
good value for a relatively weak case or a sell-out of an
otherwise strong case. The Girsh test calls upon courts to make
this evaluation from two slightly different vantage points.
According to Girsh, courts approving settlements should determine
a range of reasonable settlements in light of the best possible
recovery (the eighth Girsh factor) and a range in light of all
the attendant risks of litigation (the ninth factor). See Girsh
v. Jepson, 521 F.2d at 157; see also Malchman v. Davis, 706 F.2d
426, 433 (2d Cir. 1983) (identifying a similar test); City of
Detroit v. Grinnell Corp., 495 F.2d 448, 463 (2d Cir. 1974)
(same).
In formulaic terms we agree that "in cases primarily
seeking monetary relief, the present value of the damages
plaintiffs would likely recover if successful, appropriately
discounted for the risk of not prevailing, should be compared
with the amount of the proposed settlement." MCL 2d § 30.44 at
252. This figure should generate a range of reasonableness
(based on size of the proposed award and the uncertainty inherent
in these estimates) within which a district court approving (or
rejecting) a settlement will not be set aside. See Newman v.
Stein, 464 F.2d 689, 693 (2d Cir. 1972). The evaluating court
must, of course, guard against demanding too large a settlement
based on its view of the merits of the litigation; after all,
settlement is a compromise, a yielding of the highest hopes in
exchange for certainty and resolution. See Cotton v. Hinton, 559
F.2d 1326, 1330 (5th Cir. 77). The primary touchstone of this
inquiry is the economic valuation of the proposed settlement.
We turn to this analysis. As will appear, the district
court's conclusion that the settlement was within the range of
reasonableness rests heavily on the proposition that the class
had never proven any diminution in value of the trucks. It
ignored the fact that the coupons provided no cash value and made
no provision for repairing the allegedly life-threatening defect.
For the reasons that follow, we believe that the district court
did not sufficiently scrutinize the valuations of the settlement,
and that, on this record, the settlement appears to be
inadequate. Consequently, we will conclude that the district
court erred when it found that the settlement fell within the
range of reasonableness.
1. Valuation of the Settlement - Introduction
The value of the $1,000 certificates is sharply
disputed. GM argues that the certificates are worth close to
their face value since they can be redeemed for a broad array of
GM trucks and can be used in combination with dealer incentives.
For those unable or unwilling to purchase another GM truck, GM
argues, cash can be realized from transferring the certificate
within the household for full value or selling the certificate
for $500. Plaintiffs presented an expert, Dr. Itamar Simonson,
who placed the value of the certificates between $1.98 and $2.18
billion, based on an estimate that 34% to 38% of the class would
redeem the certificate in purchasing a new truck and an
additional 11% of the class would sell their certificates for
$500. Objectors contest these estimates and many of the
assumptions used to generate them.
We therefore analyze several of the foundations for the
district court's evaluation. First, we inquire about the
reliability of plaintiffs' witness's valuation. Second, we
explore the adequacy of the district court's consideration of the
possibility that some class members would not be able to use the
coupons at all. Third, we inquire as to whether the quite
significant restrictions on transfer of the certificates present
obstacles to the development of a market so as to render the
estimates of their worth unreasonably inflated. Finally, we
consider whether the size of the attorneys' fees agreement
suggests that GM attached a greater value to the class claims
than proponents of the settlement would have us believe. These
factors lead ineluctably to the conclusion that the district
court over-valued this settlement, which in turn gives credence
to the contention of the objectors that the proffered settlement
was, in reality, a sophisticated GM marketing program.
a. Plaintiffs' Witness Dr. Itmar Simonsen
Dr. Simonsen's methods and assumptions raise serious
doubts about the reliability of the valuations they generated.
Although Simonsen's conclusion was based on his estimate that
between 34% and 38% of the class members would use the
certificate, his own telephone survey revealed that only 14% of
the class reported that they would "definitely" or "probably" buy
a new truck. Apparently Simonsen only excluded those who
responded that they would "definitely not buy" or "probably not
buy" a new truck, a methodological choice which is questionable.
Furthermore, Simonsen discounted the statistics by seemingly
arbitrary factors in an effort to be "conservative," but without
some basis or explanation for deriving those factors, we have no
way of judging whether they were conservative or aggressive.
Even more importantly, the raw survey data probably
over-state the prospects that the certificates will be used since
there are substantial obstacles to obtaining and transferring the
certificates, none of which Simonsen deals with. Finally,
Simonsen supposed that a higher percentage of fleet owners would
redeem the certificates, but this seems to disregard the
statutory and regulatory constraints that often restrict fleet
buyers' purchase decisions. Indubitably all of these concerns
reduce the value of the settlement, yet Simonson appears simply
to have multiplied his estimated number of users by the coupon
amount or transfer value.
On the other hand, although various objectors have made
a good argument that the net value of the certificates will also
be eroded by rising truck prices (which would allegedly be
influenced both by the huge number of certificates that would
need to be redeemed within a relatively brief time and by the
fact that dealers may take advantage of customers they know to be
somewhat tied to the purchase of a GM truck by their desire to
realize value from the coupon), we will, to be conservative, not
take this factor into account. Even so Simonsen's methodology
undermines his conclusion to the extent that his valuation cannot
support the settling parties' case.
b. Inability of Class Members to Use Certificates
The district court also erred by not adequately
accounting for the different abilities (not inclinations) of
class members to use the settlement. One sign that a settlement
may not be fair is that some segments of the class are treated
differently from others. See Piambino v. Bailey, 610 F.2d at
1329; In re GM Corp. Engine Interchange Litig., 594 F.2d at 1128;
MCL 2d § 30.41 at 236. Consequently, the fact that the coupon
settlement benefits certain groups of the class and not others
suggests that the district court did not adequately discharge its
duties to safeguard the interests of the absentees. See In re
Fine Paper Antitrust Litigation, 617 F.2d 22 (3d Cir. 1980)
(ongoing duty of the judge to protect absentees); Piambino v.
Bailey, 610 F.2d 1306, 1329 (duty to assure the settlement is
fair, reasonable and adequate with respect to each category of
the class).
People of lesser financial means will be unable to
benefit comparably from the settlement. GM cites a number of
other judicially approved class action settlements that awarded
coupons and argues that, since this coupon provides far more
consideration, it necessarily merits approval. See, e.g., New
York v. Nintendo of Am. Inc., 775 F. Supp. 676, 679 (S.D.N.Y.
1991) ($5 discount coupon for video game purchase approximately
$200); In re Cuisinart Food Processor Antitrust Litig., 1983-2
Trade Cas. (CCH) ¶ 65 at 680 (D. Conn. 1983) (discount coupons
with maximum value of $100 for machines costing approximately
$100 to $300); In re Domestic Air Transp. Antitrust Litig., 148
F.R.D. 297, 331 (N.D. Ga. 1993) (certificates worth between $10
and $200 for flights costing between $50 and $1500).
These cases, however, differ dramatically in the amount
of money required to purchase the good -- i.e. to realize the
certificate's value -- and in the frequency with which a typical
consumer might expect to purchase the good. Whether a new truck
costs between $20,000 and $33,000 as some objectors claim (JA
1884, 1889-90, 2210) or some amount "far less" than that, as GM
claims, this purchase is not comparable to buying a new food
processor or even an airline ticket. As the district court
acknowledged, "a substantial number of class members" (Op. at 18)
would not be able to afford a new truck within the fifteen month
coupon period. Both the high cost of the trucks and the
infrequency of a consumer's purchase of a new truck (relative to
the fifteen month redemption period) make using these
certificates significantly more difficult than those in the other
coupon settlements, for all class members but particularly for
the poorer ones.
Even where class members do manage to use the
certificates, we are concerned about their real value. It may
not be the case that the certificates saved those class members
$1,000 on something they would have otherwise bought; those class
members may only have purchased new GM trucks because they felt
beholden to use the certificates. Thus, rather than providing
substantial value to the class, the certificate settlement might
be little more than a sales promotion for GM, in just the way
that the Bloyed court characterized the settlement as a
"tremendous sales bonanza" for GM. Bloyed v. General Motors
Corp., 881 S.W.2d at 431.
We turn then to the fleet buyers, who constitute a
readily identifiable category of plaintiffs arguably
disadvantaged by the settlement. Budgetary constraints prevent
some of them from replacing their entire fleets within the
fifteen month redemption period.26 Competitive bidding
26
. This is true of, for example, the State of Iowa, State of
Indiana, West Virginia Department of Transportation, State of New
York, Commonwealth of Pennsylvania Department of Transportation
and Department of General Services, County of Los Angeles,
California, Jefferson Parish, Louisiana, and the City of New
York.
requirements also apparently impede many of these entities from
being able to use the certificates. Because there is no
assurance that GM will be the lowest bidder, the government
entities bound by these requirements may not be able to use the
certificates. See, e.g. The Louisiana Public Bid Law, LA. R.
STAT. § 38:2212(A)(1)(a). [Jefferson Parish Brief at 5]. The
district court dismissed these objections saying it was
"confident that ingenious counsel will be able to structure
bidding requirements so that the governmental entities can take
full advantage of the certificates." (Op. at 26.) The district
court's observation, while perhaps partially accurate, represents
far too cavalier a dismissal of a potentially serious intra-class
and conflict inequity.
The named plaintiffs argue that, if certain fleet
buyers and individuals were dissatisfied with the settlement's
terms, they could simply opt-out of the class and pursue their
own relief individually. (Plaintiff's Brief at 15 n.13.) While
such an argument might theoretically be true, it ignores the
realities of pursuing small claims. It would cost considerably
more to litigate individual claims than the litigant could
recover, using either a retrofit or a warranty theory to measure
damages. And the district court apparently did not consider the
possibility of a subclass of fleet owners, though that might
alter the anatomy of the settlement. At all events, the right of
parties to opt out does not relieve the court of its duty to
safeguard the interests of the class and to withhold approval
from any settlement that creates conflicts among the class. In
sum, the relative inability of class members to use the
certificates militates against settlement approval.
c. Value of the Transfer Option
In order to support its conclusion that the settlement
was reasonable and fair, the district court cited the ability of
fleet buyers and those consumers with budget constraints to
realize value from the certificates by transferring them. We
believe the value of the transfer option is dubious, and
consequently that the settlement was unfair to substantial
portions of the class.
Simonsen's valuation of the settlement includes $157
million attributable to transferred certificates. Simonsen
calculated that holders of the certificates could realize $250
from the sale of the transferred certificates (with a $500 face
value). He gave no explanation for his assumption of a $250
market value. To the extent that this methodology is also
dubious, it compounds the skewing of the valuation wrought by his
usage estimates, see Part VI(A)(1)(a) supra.
The value of this option depends on the development of
a secondary market for these certificates. But there is no
assurance that a market will develop; indeed, the restrictions on
transfer, which GM claims are necessary to prevent fraud, pose
significant barriers to the creation of such a market. The
requirement that holders send in their $1,000 or original
certificate to exchange for the $500 transfer certificate imposes
very significant transaction costs since the parties must agree
on a price before the original holder initiates the transfer
process (which could easily last several weeks). During that
process, there is substantial market risk, for the price of the
transfer certificate could well move dramatically and induce a
breach in the purchase agreement by one of the parties. Breaches
would pose a real problem in this case because the transfer
certificate cannot be reissued in another's name and thus cannot
be resold. Because of these risks, individuals will be quite
reluctant to contract for these transfer certificates. Even
worse, the one-time transfer restriction also precludes the
development of a market making clearing house mechanism. In our
view, therefore, it is quite possible that holders will be unable
to realize any significant value from the transfer option.
Aside from the effect of the transfer restrictions, we
also question Simonsen's valuation on the basis that it did not
account for the inability to use the transfer certificates in
conjunction with other incentive plans. For example, the
incremental value of the $500 transfer certificate to class
members would be completely eroded if GM offers a $1,000 dealer
rebate program, since the class member would be forced to choose
between the plans and would therefore be no better off then the
general public.
The district court did not take cognizance of these
factors. It erred when it presumed development of a liquid
market for these transfer certificates with very little support
in the record for it, and when it relied on a putative value of
the transfer option arbitrarily ascribed by plaintiffs' expert to
find that the settlement was fair and reasonable. Although
objectors might have made out an even stronger case by proffering
their own expert on this valuation, the court has an independent
duty to scrutinize the settlement's value and any evidence
offered to support it. Accordingly, we find that evidence
pertaining to the incremental value created by the transfer
option does not support the valuation of the settlement.
d. GM's Implicit Valuation of the Claim
Our concerns about the adequacy of the settlement are
complicated by the generous attorneys' fees GM agreed to pay in
this case. Although originally GM vigorously contested the
viability of the class claims and the class, the company, in view
of its willingness to pay attorneys' fees of $9.5 million, may,
at the time of settlement, have valued the claims at some
substantial multiple of the fee award.27 This $9.5 million
27
. GM was apparently so eager to have this $9.5 million fee
approved that its counsel did not even object when the district
court applied a multiplier notwithstanding clear Supreme Court
precedent invalidating the use of multipliers. See City of
Burlington v. Dague, 112 S. Ct. at 2638. In our view, the fact
that counsel to this large multinational corporation did not
object to this clear error raises a smoking gun signaling GM's
awareness of the questionable settlement it made.
attorney's fee award seems unusually large in light of the fact
that the settlement itself offered no cash outlay to the class.
GM's apparent willingness to pay plaintiffs' counsel close to
$9.5 million indicates that the party in perhaps the best
position to evaluate the claim may have thought the action, which
both plaintiffs' counsel and the defense contend was not worth
much, posed a significant enough threat to cause GM to strike a
lucrative deal with plaintiff's counsel.
On the other hand, perhaps GM's valuation results only
from the class counsel's decision to settle the action at an
early stage and GM's desire to encourage that decision. Of
course, a decision to settle that occurs at too incipient a stage
of the proceedings also weighs against settlement approval. In
short, while the settlement certainly presented difficult
valuation issues, we believe that the district court erred when
it uncritically accepted such high estimates of the settlement's
value.
2. Valuing This Settlement Relative to The Relief Requested
The ninth Girsh factor also undermines the district
court's decision. In the class action context, "the relief
sought in the complaint" serves as a useful benchmark in deciding
the reasonableness of a settlement. See Cotton v. Hinton, 559
F.2d 1326, 1330 (5th Cir. 1977). Here the adequacy of the
certificate settlement is particularly dubious in light of the
claims alleged and the relief requested in the original
complaint. The coupons offered by GM simply do not address the
safety defect that formed the central basis of the amended
complaint filed barely four months before the settlement.28 The
district court gave two justifications for its conclusion that,
notwithstanding this discrepancy, the settlement was fair.
First, the court explained, "no objector that complains that the
settlement fails to retrofit the alleged defect has been able to
come forth with a practical and safe modification for the trucks
that has been designed, evaluated and tested." (Op at 29.)
Second, the court also relied on the fact that "[t]he proposed
class settlement does not affect the rights of settlement class
members to participate in any recall that NHTSA orders." (Op 34-
35.)
Considering the validity of these arguments, we
conclude that they do not alleviate the substantial concerns
created by the dramatic divergence of the settlement terms from
the relief originally sought. This factor, therefore,
strengthens our conviction that the settlement was not fair,
reasonable, or adequate.
a. The Retrofit Issue
It is true that there does not appear to be a
consensus retrofit. For each of the suggested retrofits --
28
. In the amended consolidated complaint, class counsel
described the trucks as "rolling firebombs" and estimated that an
additional 200 deaths would occur unless GM took prompt
corrective action. (Oral Aug. Trans. 127, 257).
relocation of the gas tank to the spare tire location,
installation of a tank with a rubber bladder, or installation of
a metal cage around the gas tank -- there was evidence that the
retrofit was either ineffective or caused other performance
problems for at least some model years. On the other hand, there
was also evidence supporting the efficacy of various retrofits.
For instance, GM's own documents considered all three options and
found that all would enhance the safety of the fuel systems. (JA
1863-64.) In addition, there was also potentially damaging
testimony by Ronald E. Elwell, an engineering analyst at GM for
fifteen of his twenty-eight years and its chief expert in
defending the fuel tank location and design on the full-size
trucks in a number of significant product liability cases, see,
e.g., Bowman v. General Motors, 427 F. Supp. 234, 236 (E.D. Pa.
1977).
In his deposition, Elwell testified that GM designed a
retrofit using a steel cage which prevented the gas tanks from
rupturing in side impact testing. He further testified that GM
abandoned the retrofit (knowing, because of its own secret crash
tests, of the increased fire danger) only because GM feared that
it would give the public the wrong impression. (Jenkins App.
119) GM attempted to impeach Elwell by characterizing him as a
"disgruntled," (former) employee. By way of rehabilitation,
objectors explain Ellwell's reduced duties as a result of health
problems. Whether or not Ellwell's testimony could itself
establish that the steel cage enhances safety, his testimony
might have been important if the case had proceeded to trial. As
a consequence, the district court abused its discretion when it
summarily dismissed Elwell's testimony.
b. Availability of Other Remedies
The district court also relied on the existence of the
NHTSA recall mechanism and the class numbers' unencumbered right
to bring personal injury suits to justify its approval of a
settlement that did not secure any of the equitable relief
originally requested. While individual tort suits are not
barred, the court's approval of this settlement (which does
nothing to redress the alleged danger) foregoes the opportunity
presented by the pleadings29 to prevent injuries that tort suits
can at best address only retrospectively. More importantly, the
NHTSA remedy may be extremely limited in that it can only require
a manufacturer to repair a vehicle first purchased within eight
calendar years of the investigation. The court's observation
that "all the plaintiffs may have statute of limitations problems
in this action that may be equally as severe or worse than the
eight year NHTSA limitation" does nothing to increase the value
of the theoretical access to a NHTSA recall remedy to the owner
or others who may be injured by the trucks at some future point.
29
. The pleadings alleged a dominant control theory which, if
successful, would have required GM, the manufacturer and
distributor of these vehicles, to remedy the allegedly
unreasonable safety defects before they could cause or exacerbate
the damage and injury resulting from a side impact collision.
Hence, the potential existence of a partial recall under NHTSA
does not dispel our doubts about the terms of the settlement
diverging so far from the original complaint. In so concluding,
we do not rely on the subsequent resolution of the NHTSA
investigation, which did not include any recall.
In sum, we agree with the district court that the
evidence of the existence of an effective retrofit to be
contradictory; nevertheless, we think that the very murkiness of
this evidence and the fact that certain key evidence was wrongly
excluded, especially in light of the magnitude of the alleged
safety defect, militates against approving a settlement attained
at such an early stage of the litigation which does nothing to
repair the vehicles, even if only by creating a fund to finance
retrofits.30
30
. The district court also based its conclusion that the
settlement was reasonable relative to the best possible recovery
(i.e., relative to the relief requested) on its doubts that a
court could or should award the recall/retrofit remedy requested.
The court expressed some doubt that it had the power to order a
recall by injunction, citing Walsh v. Ford Motor Co., 130 F.R.D.
260 (D.D.C. 1990) and National Women's Health Network Inc. v.
A.H. Robins Co., 545 F. Supp. 1177 (D. Mass. 1982). Neither of
these cases, however, conclusively establishes that the district
court would lack the power to order a recall. The fact that no
court has done it before and that there may be some logistical
issues to surmount do not themselves support the court's
conclusion; other class actions and complex litigation
settlements have developed mechanisms for supervising and
enforcing compliance with detailed affirmative injunctions. See,
e.g., MCL.2d § 33.55 ("The court may also decide to appoint a
master under Rule 53 to monitor future implementation of
injunctive features of the settlement."). Although we intimate
no view on the matter, it does seem to warrant further
consideration. At all events, the district court could clearly
have awarded relief that would require GM to set up a fund to
B. Complexity of the Suit
This factor is intended to capture "the probable costs,
in both time and money, of continued litigation." Bryan v.
Pittsburgh Plate Glass Co., 494 F.2d 799, 801 (3d Cir.), cert.
denied, 419 U.S. 900 (1974). By measuring the costs of
continuing on the adversarial path, a court can gauge the benefit
of settling the claim amicably. The district court here
concluded that the litigation "would be mammoth" and would have
resulted in a "substantial delay in . . . recovery." (JA 1708,
1713-14).
While it is true, as the Youngs objectors argue, that
the district court's conclusion in part depended on the ambitious
definition of the class in terms of both geography and models
included, (Youngs 25), the action would still involve a complex
web of state and federal warranty, tort, and consumer protection
claims even if the class had been subdivided and some of the
legal issues simplified. Had the case not been settled, both
plaintiffs and GM would have had to conduct discovery into the
background of the six million vehicles owned by class members,
including any representations allegedly made to plaintiffs. Each
side would also have needed to hire or produce a retinue of
experts to testify on a variety of complex issues. Undoubtedly,
(..continued)
finance retrofits initiated by the owners' individually. See
Bloyed, 881 S.W.2d at 433. The district court, therefore, did
not lack the power to order a remedy that would have been more
responsive to the class's concern about leaving the trucks on the
road.
GM would have ardently contested the action at every step,
leading to a plethora of pre-trial motions. In contrast, this
settlement made its remedies immediately available and avoided
the substantial delay and expense that would have accompanied the
pursuit of this litigation. The district court thus correctly
concluded that the complexity factor weighed in favor of
approving the settlement.
C. Reaction of the Class
In an effort to measure the class's own reaction to the
settlement's terms directly, courts look to the number and
vociferousness of the objectors. Courts have generally assumed
that "silence constitutes tacit consent to the agreement." Bell
Atlantic Corp. v. Bolger, 2 F.3d 1304, 1313 n.15 (3d Cir. 1993).
However, a combination of observations about the practical
realities of class actions has led a number of courts to be
considerably more cautious about inferring support from a small
number of objectors to a sophisticated settlement. See, e.g., In
re Corrugated Container Antitrust Litig., 643 F.2d at 217-18; GM
Interchange Litig., 594 F.2d at 1137.
In a class action case involving securities litigation,
this court has recognized the possibility that the assumption
that silence constitutes tacit consent "understates potential
objectors since many shareholders have small holdings or
diversified portfolios, . . . and thus have an insufficient
incentive to contest an unpalatable settlement agreement because
the cost of contesting exceeds the objector's pro rata benefit."
Bell Atlantic Corp. v. Bolger, 2 F.3d at 1313 n.15. Although
this is not a securities class action and the amounts at stake
could be significant, the absentees may not fully appreciate the
size of their potential claims since, by excluding those owners
whose trucks have already experienced some mishap related to the
fuel tank design, the class may include only those who have no
reason (outside of media coverage) to know of the latent defect
or the claim based on the alleged existence of that defect.
Even where there are no incentives or informational
barriers to class opposition, the inference of approval drawn
from silence may be unwarranted. As we noted earlier, Judge
Posner has explained that "where notice of the class action is
. . . sent simultaneously with the notice of the settlement
itself, the class members are presented with what looks like a
fait accompli." Mars Steel, 834 F.2d at 681. In this case
especially, the combined notice largely defeats the potential for
objection since the notice did not inform the class that the
original complaint had sought a retrofit.31 Without information
about the original complaint, absentees lacked any basis for
comparing the settlement offered to them to the original prayer.
31
. There may also have been other deficiencies in the notice.
The fact that the notice did not disclose the attorneys fees that
the class counsel and defendants agreed to, and the fact that the
notice suggested that class members could also have a recall
remedy from NHTSA (though many of the trucks were so old that
NHTSA lacked the power to recall them), may also have helped
suppress potential objection.
It is instructive that many of the better-informed absentees, the
fleet owners, did object.
The fact that a poll conducted by class counsel's
marketing expert reported that a minimum of 63% of the class
would probably or definitely not use the coupon to purchase a new
truck also suggests that the class could not possibly have so
wholeheartedly endorsed the settlement. Moreover, one cannot
infer approval of the settlement from requests for the transfer
of the certificates, as the district court did. Those requests
only signify that certain class members attempted to maximize the
value they could realize from the settlement with which they were
presented and thus might illustrate how futile class members
thought objecting would be.
Although the absolute number of objectors was
relatively low,32 there are other indications that the class
reaction to the suit was quite negative: The seemingly low
number of objectors includes some fleet owners who each own as
many as 1,000 trucks, and those who did object did so quite
vociferously. In conjunction with the already-noted problems
associated with assuming that the class members possessed
adequate interest and information to voice objections, the
appeals of those who actually objected demonstrate that the
reaction of the class was actually negative, and not supported by
32
. Of approximately 5.7 million class members, 6,450 owners
objected and 5,203 opted out.
the "vast majority of the class members" as the district court
concluded. (Op at 8.) The class reaction factor plainly does
not, contrary to the district court's conclusion, weigh in favor
of approving the settlement.
D. Stage of Proceedings
The stage-of-proceedings facet of the Girsh test
captures the degree of case development that class counsel have
accomplished prior to settlement. Through this lens, courts can
determine whether counsel had an adequate appreciation of the
merits of the case before negotiating. The district court found
that this factor favored settlement approval, relying on the fact
that settlement was presented for approval less than six months
prior to the scheduled trial date.
Given the purpose of this inquiry, however, it is more
appropriate to measure the stage by reference to the commencement
of proceedings either in the class action at issue or in some
related proceeding. See In re Beef Antitrust, 607 F.2d at 180
(court referred to discovery in companion cases); City of Detroit
v. Grinnell Corp., 356 F. Supp. 1380, 1386 (S.D.N.Y. 1972), rev'd
on other grounds, 495 F.2d 448 (2d Cir. 1974) (noting the
extensive discovery in that and parallel cases); In re Baldwin-
United Corp., 105 F.R.D. at 483 (access to expert testimony and
other evidence from parallel state court proceedings as well as
to relevant public documents led court to believe counsel
"availed themselves of all of these sources of information and
conducted full adversarial negotiations. . ."); 2 NEWBERG & CONTE §
11.45 at 11-102 n.247.
The relevant period of time this case was in litigation
was quite brief; approximately four months elapsed from the
filing of the consolidated complaint to reaching the settlement
agreement. To be sure, we cannot measure the extent of counsel's
effort from the time of the litigation alone; class counsel in
this case are known to be quite industrious, and the district
court properly considered class counsel's review of the materials
from prior product liability proceedings and from the Moseley
personal injury case, Mosley v. General Motors Corp., No. 90-v-
6276 (Fulton County, Ga. Feb. 4, 1993). However, mere access to
the materials from other proceedings does not establish that
counsel developed the merits, particularly where the other cases
were premised on different theories of recovery. While we have
no doubt that class counsel diligently reviewed those materials
during the relevant period, nothing in the record demonstrates
that they had conducted significant independent discovery or
investigations to develop the merits of their case (as opposed to
supporting the value of the settlement), that they had retained
their own experts, or that they had deposed a significant number
of the individuals implicated in the materials from these other
proceedings. It is particularly noteworthy that the plaintiffs
did not depose Ronald Elwell, although he could potentially have
offered evidence that would have substantially bolstered the
plaintiffs' case. See Part VI(A)(2)(a) supra.
At all events, the inchoate stage of case development
reduces our confidence that the proceedings had advanced to the
point that counsel could fairly, safely, and appropriately decide
to settle the action. While the district court may have,
laudably, been attempting to minimize the funds expended on
discovery in order to maximize the funds available to the class,
we think that the district court erred by not assuring that
adequate discovery had been taken.
Beyond the incipient stage of the case and the modest
indications of substantive development, there is little basis for
presuming vigorous proscution of the case from the fact that
settlement negotiations occurred. In ordinary class action
settlements (i.e., where the court certifies the class before
settlement negotiations commence) courts can presume that the
negotiations occurred at arm's length because they have already
determined that the counsel negotiating on behalf of the class
adequately represents the class's interests. See Part IV(E)
supra, (discussion of adequacy of representation). In cases such
as this one, however, where there has been no determination by
the court that a proper class exists, the mere fact that
negotiations transpired does not tend to prove that the class's
interests were pursued. Id. In short, the incipient stage of
the proceedings poses an even larger obstacle to settlement
approval in settlement class situations than it would in normal
class action settlements since courts have no other basis on
which to conclude that counsel adequately developed the claims
before deciding to settle.
Furthermore, to the extent that this stage-of-
proceedings factor also aims to assure that courts have enough
exposure to the merits of the case to enable them to make these
evaluations, it cannot support settlement approval here. With
little adversarial briefing on either class status or the
substantive legal claims, the district court had virtually
nothing to aid its evaluation of the settlement terms. We
therefore conclude that the district court clearly erred in
finding that this factor weighed in favor of settlement approval.
E. Risks of Establishing Liability
By evaluating the risks of establishing liability, the
district court can examine what the potential rewards (or
downside) of litigation might have been had class counsel elected
to litigate the claims rather than settle them. See In re
Baldwin-United Corp., 105 F.R.D. 475, 482 (S.D.N.Y. 1985)
(comparing advantages of an immediate cash payment with risks
involved in long and uncertain litigation). The district court
here concluded that this factor also weighed in favor of
approving the settlement since "there appear[ed] to be a
substantial risk in establishing liability because of the
complexity and size of the case along with the legal and factual
problems raised by GM." (Op. at 14) (JA 1708). While we agree
with the district court that, on balance, the prospective
difficulty faced by a nationwide class of establishing liability
favored settlement, we believe the question is much closer than
it thought, and thus the factors do not weigh heavily in favor of
settlement as the district court believed.
We do not gainsay that the plaintiff class faced
considerable obstacles in establishing liability. First, it is
not clear that the plaintiffs could maintain the federal causes
of action (the Lanham Act and Magnuson-Moss Act claims) without
some proof that the trucks suffered some decline in value, which
the class was unable to demonstrate by published Kelley Blue Book
figures. Second, the trucks complied with the applicable federal
safety standards during the relevant times. This would
undoubtedly be strong, though not necessarily conclusive,
evidence that the trucks were not (legally) defective.
Statistics offered by GM also suggest that the trucks presented
no greater risk than other trucks or vehicles. See (JA 1978,
2168). Moreover, data from actual accidents, as opposed to crash
tests, failed to reveal any statistically significant difference
in post-collision fires, injuries or death relative to Ford or
Dodge full-size pickups. Finally, to the extent that state law
requires proof of individualized reliance for the
misrepresentation claims, that would seem to pose a substantial
barrier to proving class-wide liability (though, as noted below,
that issue can be the subject of separate proceedings).
On the other hand, we are not impressed by some of the
factors relied upon by the district court to support its finding
of substantial risk in proving liability. The court cited the
legal obstacles faced by the class, such as statutes of
limitations varying in different states, the lack of vertical
privity for the warranty claims (required in some states), the
varying expiration of warranty durational limits, and the bar
under some state laws to recovery for economic losses on tort
claims. (JA 1708, 1718-22). In response to these concerns, we
point out that variations in the state procedural rules
applicable to the class members have not prevented courts,
including this one, from adjudicating class claims. See Hoxworth
v. Blinder, Robinson & Co., 980 F.2d 912, 924 (3d Cir. 1992)
(affirming finding of (b)(3) predominance despite differences in
state law). Moreover, even if these variations precluded the
successful prosecution of the class claims, qua class claims, in
this case they would not necessarily doom the action to failure.
Many of the difficulties posed by these variations
could have been surmounted (or were more likely to be surmounted)
if the action were not treated as a national class. Hence, the
fact that the only other national automotive product defect class
action ended in a defense verdict does not weigh heavily in favor
of settlement. Indeed, to the extent that state-by-state
variations in procedural laws created legal obstacles, the
district court should have considered dividing the action into
geographic sub-classes instead of considering the entire
nationwide class to be hobbled. Additionally, the court should
have considered making the inquiry we made in In re School
Asbestos Litig., 789 F.2d at 1110, as to whether the case in
terms of claims and defenses might fall into three or four
patterns so that, with the use of special verdict forms, the case
might have been manageable.
We also note that, in other cases, courts have
certified nationwide mass tort class actions, which also include
myriad individual factual and legal issues, relying on the
capacity for a court to decertify or redefine the class
subsequently if the case should become unmanageable. See, e.g.,
In re School Asbestos Litig., 789 F.2d at 1110 (3d Cir. 1986).
See also Bruce H. Nielson, Was the Advisory Committee Right?:
Suggested Revisions of Rule 23 to Allow More Frequent Use of
Class Actions in Mass Tort Litigation, 25 HARV. J. LEGIS. at 469
("Some federal district court judges have suggested that this
problem could be overcome and that multistate and nationwide
classes could be certified by . . . using Rule 23(c)(4)
subclasses to account for variances in state law . . . ."); see
infra discussion on Risks of Maintaining Class Status. In any
event, the failure of the district court to analyze the
applicability of these various defenses to the different groups
of plaintiffs may itself constitute an abuse of discretion. See
Piambino v. Bailey, 610 F.2d 1306, 1329 (5th Cir. 1980)
("[Vacatur] is demanded by the failure to assess the interests of
the categories of plaintiffs and whether the settlement was fair,
adequate and reasonable as to each." (emphasis in original)); see
also Piambino v. Bailey, 757 F.2d 1112 , 1140 (11th Cir. 1985).
In addition, a plethora of other evidence buttressed
the class claims. First, the depositions and affidavits from GM
engineers, including Elwell, characterizing the design as
indefensible, would have strongly supported the class claims
notwithstanding the fact that Elwell was arguably vulnerable to
impeachment on the basis of his own employment history. Second,
the evidence from Zelenuk v. GM, No. 96-131262 (Tex. 1992), that
GM concealed crash tests might have been admitted in this
proceeding. Third, the fact that GM has prevailed in three of
the eight C/K pickup product liability trials does not support
the settlement by confirming the weakness of the underlying
claims, for at least two other plausible interpretations could
explain this statistic. The fact that plaintiffs prevailed in
five of the eight actions suggests that the claim alleged here
was not so weak after all, at least if alleged by suitable
plaintiffs. Moreover, such a statistic understates plaintiffs
recoveries for these types of claims by not accounting for the
individual settlements that have been reached.
While we recognize that establishing liability would by
no means have been easy or certain for the plaintiffs, the
district court over-emphasized the importance of defenses
applicable to only some class members under certain state laws
and incorrectly discounted a significant body of evidence
pertinent to proving liability. Therefore, it is not clear that
plaintiffs faced the grave prospects on the merits that the
district court apparently believed when it approved this
settlement. In any event, the district court's failure to
distinguish between groups of plaintiffs that did and those that
did not confront difficult state law defenses constitutes an
abuse of discretion. Piambino, 610 F.2d at 1329.
F. Risks of Establishing Damages
Like the previous factor, this inquiry attempts to
measure the expected value of litigating the action rather than
settling it at the current time. The district court relied
heavily on this factor in approving the settlement: "[B]ecause
the plaintiffs cannot adequately prove diminished value [of the
pickups], the court concludes that risks of proving damages weigh
strongly in favor of approval of the proposed class settlement."
(Op. at 15)(JA 1708, 1722). We do not share the district court's
confidence, and conclude that this factor does not weigh strongly
in favor of settlement.
GM argues that the class's warranty claim amounts to a
claim for diminished resale value. Some United States Courts of
Appeals and some state courts have rejected such claims either on
the grounds that a warranty of merchantability does not include
any guarantee about the product's resale value, see, e.g.,
Carlson v. General Motors Corp., 883 F.2d 287, 298 (4th Cir.
1989), cert. denied, 495 U.S. 904 (1990), or on the basis that
the tort law of many states precludes tort claims for purely
economic loss, see GM APPX. tab 14, 3062, 3105. In assessing
this Girsh factor, the district court relied on its belief that
the class could not demonstrate any diminution of the trucks'
value relative to Ford and Dodge trucks by referring to the
Kelley Blue Book.
We do not, however, believe that this is the only
permissible approach to measuring the value of the defect.
According to the Uniform Commercial Code, "the measure of damages
for breach of warranty is the difference at the time and place of
acceptance between the value of the goods accepted and the value
they would have had if they had been as warranted, unless special
circumstances show proximate damages of a different amount." UCC
§ 2-714(2). Although diminished resale value might represent one
method of measuring the damage suffered by owners from the
publicity about the fuel tanks, it does not fully measure the
difference between the value the defect-free truck would have had
at delivery and the actual value of the truck as delivered.
Measuring damages with a focus on resale value confounds the
effects of varying rates of depreciation with the effect of the
defect on the market value. The comparisons to the trucks of
other manufacturers are similarly deficient measures since they
fail to gauge the effect of the defect on the value of the trucks
at delivery.
The cost of a retrofit, which effectively puts the
truck in the condition in which it allegedly should have been
delivered, may constitute an alternative measure of the damages
arising from the breach of warranty. It has the advantage of
avoiding the speculative exercise of ascertaining the
hypothetical value of defect free trucks. See, e.g., McGrady v.
Chrysler Motors Corp., 360 N.E.2d 818, 821-22 (Ill. App. Div.
1977) (affirming an award of actual repair expenses where
measuring value of vehicles as warranted upon delivery would be
speculative); Nelson v. Logan Motor Sales, Inc., 370 S.E.2d 734,
737 (W. Va. 1988) (reversing a ruling that repair costs were not
evidence relevant to the value of the goods as accepted).
Nothing in the UCC precludes such a measure; in fact, § 2-714(1)
of the Uniform Commercial Code provides:
Where the buyer has accepted goods and given
notification he may recover as damages for any non-
conformity the loss resulting in the ordinary course of
events from the seller's breach as determined in any
manner which is reasonable.
(emphasis added)(citation omitted).33
33
. GM argues that a repair remedy is available only when it is
less costly to the defendant than diminution in value. We think
Because the district court based its determination of
this factor on its exclusive reference to the Kelley Blue Book
and refused to consider alternative measures that appear to
provide concrete (and substantial) damage figures, we believe
that the court erred in finding that the risks of proving damages
were so great that they strongly favored settlement approval.
G. Risks of Maintaining Class Status
The value of a class action depends largely on the
certification of the class because, not only does the aggregation
of the claims enlarge the value of the suit, but often the
combination of the individual cases also pools litigation
resources and may facilitate proof on the merits. Thus, the
prospects for obtaining certification have a great impact on the
range of recovery one can expect to read from the action.
The district court found that this factor favored
settlement, although it did not place great weight on it. (Op.
at 16-17.) The court cited the "myriad factual and legal
issues"34 and the vigorous contest waged by GM prior to
(..continued)
that such rigid rules are inappropriate, and that the court
should carefully consider all of the proffered measures of
damages. In any event, the costs of retrofit, though unsettled
by the district court as of this juncture, will be less than the
diminution in value (if the settling parties' valuation of the
certificates is any indication of that diminution).
34
. The legal issues that might vary among class members
included the claims of breach of warranty, negligent
misrepresentation, and negligence and products liability, which
would be based on the various state laws. Potentially variable
factual issues included the fact that the disputed trucks did not
use a single gas tank design, and the individualized proof of
settlement negotiations as the basis for this finding. Id. Two
observations, which the district court appeared to ignore, weaken
the basis for its finding that the risk involved in maintaining
class status favored settlement.
First, Rule 23(a) does not require that class members
share every factual and legal predicate to meet the commonality
and typicality standards. Baby Neal v. Casey, 43 F.3d 48, 56 (3d
Cir. 1994); Hassine v. Jeffes, 846 F.2d 169 (3d Cir. 1988).
Indeed, a number of mass tort class actions have been certified
notwithstanding individual issues of causation, reliance, and
damages. See, e.g., In re School Asbestos Litig., 789 F.2d at
1009. Because separate proceedings can if necessary, be held on
individualized issues such as damages or reliance, such
individual questions do not ordinarily preclude the use of the
class action device. See, e.g., Eisenberg v. Gagnon, 766 F.2d
770, 786 (3d Cir. 1985).
For example, in School Asbestos, the court certified a
nationwide (b)(3) class after counsel demonstrated to the court
how the laws of the 50 states could be reduced to four general
patterns, providing the framework for sub-classes if the
nationwide action had proven unmanageable.35 School Asbestos,
(..continued)
reliance required in some jurisdictions for fraud, negligent
misrepresentation, and breach of warranty claims.
35
. The district court could retain the sub-classes although
they might not have properly been brought in that court
originally. Cf. In re Agent Orange Prod. Liab. Litig., 100
F.R.D. 718, 724 (E.D.N.Y. 1983) (recognizing hypothetical need of
the court to apply the laws of different states); In re Agent
789 F.2d at 1110. Although there was no such demonstration in
this case, we have no reason to doubt that such a demonstration
would have been possible, for we cannot conceive that each of the
forty-nine states (excluding Texas) represented here has a truly
unique statutory scheme, or that all of the model years possessed
distinct fuel truck designs. Damage issues, moreover, are not as
individualized as the district court seemed to assume: the cost
of repair could have served as the measure, and that cost would
not vary much among class members. Hence, it is quite possible
that a nationwide class could have been properly certified here.
Second, even if the action could not be certified as it
was originally filed, the district court disregarded the
possibility that there were other ways to aggregate the
litigation and/or adjudication of these claims. The court might
have considered dividing the class into geographic or model-year
subclasses or allowing the case to continue as a multi-district
litigation for the remainder of pre-trial discovery. Each of
those alternatives could have surmounted some of the individual
issues while retaining some of the substantive advantages of the
class action as framed here. Thus, the court's conclusion that
this factor favored settlement may have reflected its mistaken
all-or- nothing approach to certifying this national class.
(..continued)
Orange Prod., 580 F. Supp. 690 (E.D.N.Y. 1984) (performing choice
of law analysis).
Additionally, some of the district court's bases for
finding such a significant risk in the ability to maintain class
status undermine our confidence in the appropriateness of the
district court's certification of the settlement class. For
instance, if the district court correctly concluded that there
were insurmountable barriers to class treatment, it could not
certify the class for settlement purposes. See Part IV(F) supra.
It is true that settlement can reduce the differences among class
members. But as we have explained, the standard for
certification is the same for settlement classes as for
conventional classes.
Moreover, if the class members' claims differed so much
as to preclude certification even of geographic subclasses, a
settlement that treats all class members alike cannot be adequate
and fair to all of them. For reasons stated above, this
settlement does not even appear to treat all members of the class
equitably. See Parts V(B) and VI(A)(1)(b) supra. Indeed, the
settlement arguably affords the least relief to those class
members with the most valuable claims, i.e., the fleet owners.
See Part VI(A)(1)(b) supra. The district court's concern,
therefore, that the class could not maintain its class status, is
somewhat inconsistent with its certification of the class for
settlement purposes.36
36
. This anomaly is at least partially attributable to the
court's failure to certify the class in the manner required by
Rule 23. But some part of the inconsistency signals that the
We must agree that this class, even if appropriately
crafted, confronted significant difficulties in maintaining its
status in light of the claims alleged. Nevertheless, we are once
again left with the impression that the district court too
hastily approved a settlement because of its perhaps exaggerated
concern that the quite ambitious initial nationwide definition of
the class made it too difficult to form a class or group of
classes capable of litigating these claims.
H. Ability to Withstand Greater Judgment
We find no error in the district court's resolution of
this final Girsh factor -- whether the defendant has the ability
to withstand a greater judgment. The district court determined
that GM "could withstand a judgment greater than the proposed
settlement," (Op. at 17), although it did not attribute any
significance to this finding "under these facts."
I. Summary
Assuming arguendo that the district court had validly
certified the settlement class (i.e., properly determined that it
met the requisites of Rule 23) we hold that the settlement is not
fair, reasonable, or adequate under the nine factor Girsh test of
this circuit. The case was simply settled too quickly with too
little development on the merits for certificates that may well
be worth significantly less than the $1.98 to $2.18 billion
(..continued)
district court ignored the various ways that the class claims
could be manageably litigated.
estimate accepted by the district court. We conclude that the
district court erred by accepting plaintiffs' witness' estimated
valuations when those so clearly lacked a sound methodological
basis and when there were so many other indications -- including
the inability of fleet owners and less wealthy class members to
use the certificates, the dubious value of the transfer option,
and GM's own apparent valuation of the claim -- that the
settlement was inadequate and unreasonable, and may even have
been a marketing boon to GM.
Additionally, the failure of this settlement to abate
the lingering safety problem, despite the vociferousness of the
arguments for some recall or retrofit in the initial complaint,
enhances our conviction that this settlement is inadequate.
Beyond its dubious valuation of the settlement, the district
court also over-estimated the risks of proving liability and
damages and of maintaining class-status and under-estimated the
true degree of opposition to the settlement. The district court,
however, correctly applied the complexity-of-suit and defendants-
capacity-for-greater-judgment factors.
Although we are not bound in any way by the proceedings
in the separate Texas action, our decision today shares many of
the concerns expressed by the Texas appellate court which set
aside an approval of a very similar coupon settlement. See
Bloyed, 881 S.W.2d at 422. Rule 42 of the Texas Rules of Civil
Procedure, which governs class actions, is patterned after
Federal Rule of Civil Procedure 23. The Bloyed court also was
concerned about a settlement that provided absolutely nothing to
those unwilling or unable to purchase another GM truck and that
did nothing about the allegedly dangerous vehicles left on the
road. The Texas court objected as well to the $9.5 million in
attorneys fees negotiated between that class's counsel and GM.
Balancing the Girsh factors, on the current record,
this settlement clearly fails to meet the standards required for
judicial approval. We leave open the possibility, however, that
the district court on remand might develope the record more
fully, properly approve the settlement, in either its original or
a re-negotiated form, and, following the guidance offered by this
opinion, certify the settlement class.
VII. APPROVAL OF THE ATTORNEYS' FEE AWARD
The French and Young objectors also contest the
district court's award of attorneys' fees. (Order Dec. 20, 1993
and Feb. 2, 1994.) The court initially awarded fees without an
independent review of the agreement, explaining its refusal to
review the award: "[The fee agreement] is a matter of contract
between the parties, rather than a statutory fee case, . . . and
payment of the fees will have no impact on the class members
...." (JA 1772, OP 3) Subsequently, on February 2, 1994, the
court issued an "amplification" of its prior ruling, which
justified the award under both the lodestar37 and the percentage
of recovery38 methods. Class counsel maintain that the objectors
lack standing to contest the agreement made between GM and
themselves, and that the objectors waived their right to appeal
the award by not raising their objections below. Although our
disposition of the certification and settlement approval issues
obviates the need for a review of the fee award at this stage
(and moots the waiver question), we highlight some of the primary
issues in analyzing the appropriateness of a particular fee
agreement for the district court on remand (in the event that the
record is expanded, the class certified, and the settlement
approved).
At the outset, we note that a thorough judicial review
of fee applications is required in all class action settlements.
The district court did not accommodate practical realities here
when, rationalizing its initial refusal to review the fee, it
stated that the fee award was "to be paid by General Motors
Corporation and will in no way reduce the recovery to any of the
settlement class members." (JA 1771.) Indeed, this court has
recognized that "a defendant is interested only in disposing of
the total claim asserted against it; . . . the allocation between
37
. The lodestar method calculates fees by multiplying the
number of hours expended by some hourly rate appropriate for the
region and for the experience of the lawyer.
38
. The percentage of recovery method resembles a contingent fee
in that it awards counsel a variable percentage of the amount
recovered for the class.
the class payment and the attorneys' fees is of little or no
interest to the defense." Prandini v. National Tea Co., 557 F.2d
1015, 1020 (3d Cir. 1977); 2 NEWBERG & CONTE § 11.09 (purpose of
judicial review is to police abuses even where defendant pays
plaintiff's fees). In light of these realities, class counsel's
argument that objectors have no standing to contest the fee
arrangement is patently meritless: the fee agreement clearly
does impact their interests, as it is, for practical purposes, a
constructive common fund.
Moreover, as discussed at length in the adequacy of
representation section, see Part V(B)(3) supra, the divergence in
financial incentives present here creates the "danger . . . that
the lawyers might urge a class settlement at a low figure or on a
less-than-optimal basis in exchange for red-carpet treatment for
fees," Weinberger v. Great Northern Nekoosa Corp., 925 F.2d 518,
524 (1st Cir. 1991). See also Prandini v. National Tea Co., 557
F.2d at 1020 ("When the statute provides that a fee is to be paid
as a separate item, the conflict between client and attorney may
not be as apparent . . . . It is often present nonetheless.").
This generates an especially acute need for close judicial
scrutiny of the fee arrangements that implicate this concern.
See In re Agent Orange Prod. Liab. Litig., 818 F.2d 216, 224 (2d
Cir. 1987) ("The test to be applied is whether, at the time a
fee sharing agreement is reached, class counsel are placed in a
position that might endanger the fair representation of their
clients and whether they will be compensated on some basis other
than for legal services performed."); Piambino v. Bailey, 757
F.2d at 1139 ("Because of the potential for a collusive
settlement, a sellout of a highly meritorious claim, or a
settlement that ignores the interests of minority classes
members, the district judge has a heavy duty to ensure that . . .
the fee awarded plaintiffs' counsel is entirely appropriate.").
We have previously acknowledged that the potential for conflict
between the class and its counsel is not limited to situations
meeting the strict definitions of a common fund.39
As we have also explained in this opinion, courts must
be especially vigilant in searching for the possibility of
collusion in pre-certification settlements. See Part IV(e)
supra. In addition, the court's oversight task is considerably
complicated by the fact that these attorney-class conflicts are
often difficult to discern in the class action context, "where
full disclosure and consent are many times difficult and
frequently impractical to obtain." Agent Orange, 818 F.2d at 224
(citations omitted). Finally, we emphasize that the court's
oversight function is not limited to detecting "the actual abuse
[that potential attorney-class conflicts] may cause, but also for
39
. The common fund doctrine provides that a private plaintiff,
or plaintiff's attorney, whose efforts create, discover,
increase, or preserve a fund to which others also have a claim,
is entitled to recover from the fund the costs of his litigation,
including attorneys' fees. Vincent v. Hughes Air West, Inc., 557
F.2d 759 (9th Cir. 1977).
potential public misunderstandings they may cultivate in regard
to the interests of class counsel." Agent Orange, 818 F.2d at
225 (citing Susman v. Lincoln American Corp., 561 F.2d 86, 95
(7th Cir 1977), and Prandini v. National Tea Co., 557 F.2d 1015,
1017 (3d Cir. 1977)); see also Grinnell I, 495 F.2d at 469; ABA
Code of Professional Resp. Canon 9 (1975). On remand, therefore,
the district court must be alert to the presence in the fee
agreement of any actual abuse or appearance of abuse capable of
creating a public misunderstanding.
Having emphasized the necessity for judicial review of
fee awards in all class action settlements, we will briefly
clarify some principles of fee approval for the district court to
apply on remand if it certifies a class and approves settlement.
Because the district court purported to use both the
lodestar and the percentage-of-recovery methods, the actual
grounds for its approval of the fee are not entirely clear.
Although it is sensible for a court to use a second method of fee
approval to cross check its conclusion under the first method, we
believe that each method has distinct advantages for certain
kinds of actions, which will make one of the methods more
appropriate as a primary basis for determining the fee. Here,
for the reasons that follow, the court should probably use the
percentage of recovery rather than the lodestar method as the
primary determinant, although the ultimate choice of methodology
will rest within the district court's sound discretion.
The lodestar and the percentage of recovery methods
each have distinct attributes suiting them to particular types of
cases. See Task Force, 108 F.R.D. at 250-53. Ordinarily, a
court making or approving a fee award should determine what sort
of action the court is adjudicating and then primarily rely on
the corresponding method of awarding fees (though there is, as we
have noted, an advantage to using the alternative method to
double check the fee).40
Courts generally regard the lodestar method, which uses
the number of hours resonably expended as its starting point, as
the appropriate method in statutory fee shifting cases. Because
the lodestar award is de-coupled from the class recovery, the
lodestar assures counsel undertaking socially beneficial
litigation (as legislatively identified by the statutory fee
shifting provision) an adequate fee irrespective of the monetary
value of the final relief achieved for the class.
This de-coupling has the added benefit of avoiding
subjective evaluations of the monetary worth of the intangible
rights often litigated in civil rights actions. Outside the pure
statutory fee case, the lodestar rationale has appeal where as
here, the nature of the settlement evades the precise evaluation
needed for the percentage of recovery method. The lodestar
40
. For example, a court can use the lodestar method to confirm
that a percentage of recovery amount does not award counsel an
exorbitent hourly rate; similarly, the percentage of recovery
method can be used to assure that counsel's fee does not dwarf
class recovery.
method has the added benefit of resembling modes of fee
determination in conventional bipolar litigation. On the other
hand, the lodestar method has been criticized as giving class
counsel the incentive to delay settlement in order to run up fees
while still failing to align the interests of the class and its
counsel, and because it does not rewarding counsel incrementally
for undertaking the risk of going to trial. See Coffee,
Understanding the Plaintiff's Attorney, 86 COLUM. L. REV. at 691.
Courts use the percentage of recovery method in common
fund cases on the theory that the class would be unjustly
enriched if it did not compensate the counsel responsible for
generating the valuable fund bestowed on the class. See Task
Force, 108 F.R.D. at 250. Because these cases are not presumed
to serve the public interest (as evidenced by the lack of a fee
statute), there is no social policy reason that demands an
adequate fee. Instead, the court apportions the fund between the
class and its counsel in a manner that rewards counsel for
success and penalizes it for failure. Courts have relied on
"common fund" principles and the inherent management powers of
the court to award fees to lead counsel in cases that do not
actually generate a common fund. See, e.g., In re Air Crash
Disaster at Florida Everglades, 549 F.2d 1006 (5th Cir. 1977)
(using common fund principles in settlement of consolidated
cases). The rationale behind the percentage of recovery method
also applies in situations where, although the parties claim that
the fee and settlement are independent, they actually come from
the same source.
We believe that this case presents a situation more
closely aligned with the common fund paradigm than the statutory
fee paradigm. Although class counsel and GM contend (and the
district court believed) that the fee was a separate agreement,
thus superficially resembling the separate awards in statutory
fee cases, private agreements to structure artifically separate
fee and settlement arrangements cannot transform what is in
economic reality a common fund situation into a statutory fee
shifting case. Certainly, the court may select the lodestar
method in some non-statutory fee cases where it can calculate the
relevant parameters (hours expended and hourly rate) more easily
than it can determine a suitable percentage to award. But the
court must vigilantly guard against the lodestar's potential to
exacerbate the misalignment of the attorneys' and the class's
interests. See Coffee, Understanding the Plaintiff's Attorney,
86 COLUM. L. REV. at 717.
In this case, the fee clearly was not made pursuant to
a statute; therefore no legislatively endorsed policy favors
assuring counsel an adequate fee. And the settlement, though
difficult to value, did not award the even more hard-to-value
intangible rights that could in some limited circumstances
justify using the lodestar method. In sum, although this case
presents a hybrid, we believe that it more closely resembles a
common fund case.
At all events, to the extent that the district court
relied on the lodestar method, it erred by applying a multiplier.
In the lodestar section of its analysis, the district court
calculated the multiplier needed to apply to the simple lodestar
result, $3,158,182, to obtain the requested amount, $9,500,000.
(see Feb. order at 4-5.) After estimating the multiplier to be
between 2.5 and 3, the court proceeded with a "contingent nature
of the success" analysis of the multiplier's appropriateness from
Lindy. See Lindy Bros. Builders Inc., v. American Radiator &
Standard Sanitary Corp., 540 F.2d 102, 116-17 (3d Cir. 1976).
The Supreme Court, however, has rejected the use of multipliers
to enhance the lodestar's hourly rate amount. See City of
Burlington v. Dague, 112 S. Ct. at 2638. Notwithstanding this
clear Supreme Court precedent, GM's counsel failed to apprise the
district court about Dague even though its pertinence was patent.
To the extent that the district court construed the fee
agreement as a common fund, its analysis also appears to
misapprehend key aspects of the percentage of recovery method.
In common fund cases, a district judge can award attorneys' fees
as a percentage of the fund recovered. See Blum v. Stenson, 465
U.S. 886, 900 n.16, 104 S. Ct. 1541 n.16 (1984); In re Smithkline
Beckman Corp. Secur. Litig., 751 F. Supp. 525 (E.D. Pa. 1990).
One court has noted that the fee awards have ranged from nineteen
percent to forty-five percent of the settlement fund. Id. at
533. Here, the district court summarily asserted that, although
it could not value the settlement precisely, "whatever method is
used in computing the ultimate value of the settlement, the
attorneys' fees sought in this action will constitute an
extremely small percentage of the total value and will be minute
compared to the aforesaid 19-45% range." (Feb. order at 10.)
Given our skepticism of the settlements' value
generally and of Simonsen's estimates in particular (see supra
discussion on settlement fairness), we are much less sanguine
that the $9,500,000 fee actually constitutes an acceptable
percentage of the class recovery. On the current record, we are
constrained to reject that conclusion. At the very least, the
district court on remand needs to make some reasonable assessment
of the settlement's value and determine the precise percentage
represented by the attorneys' fees. The problem, however, is not
simple, for arguably, any settlement based on the award of
certificates would provide too speculative a value on which to
base a fee award. (See Task Force, 108 F.R.D. at 250-53
(discussing the preferability of the lodestar method for civil
rights actions where the difficulty of valuing injunctive relief
complicates the calculation of a fee using the percentage
method.)
On remand, the district court might wish to examine the
fee primarily under the percentage of recovery scheme. If so,
the court will need to determine a precise valuation of the
settlement on which to base its award. The court may however, as
a check, want to use the lodestar method to assure that the
precise percentage awarded is not unreasonable.
VIII. OTHER ISSUES; CONCLUSION
Objectors also appealed the district court's denial of
discovery into the settlement negotiations and the adequacy of
the notice with respect to the attorneys' fees. In light of our
holding on the certification and settlement approval issues and
its effect on the need for us to judge the fee award, we need not
reach these issues.
For the foregoing reasons, we will vacate the orders
certifying the provisional class and approving the settlement and
remand for further proceedings consistent with this opinion.
Parties to bear their own costs.
In Re: General Motors Corporation Pick-Up Truck Fuel Tank
Products Liability Litigation, Nos. 94-1064, 94-1194, 94-1195,
94-1198, 94-1202, 94-1203, 94-1207, 94-1208 and 94-1219
JOHN R. GIBSON, Senior Circuit Judge, concurring in the central
holding and with the judgment.
The court today issues a truly masterful opinion. I
concur fully in the central holding of the court that the
district court failed to make adequate findings under Rule 23(a)
to justify class certification, and that the case must be
remanded to the district court for further proceedings, and
amplification of the record. I concur fully in the reasoning of
the court that supports this conclusion and holding, and concur
specifically in Parts I, II, III, IV.A, D, E, F, and V.A and B.1
of the opinion.
In addition, I certainly agree that it follows that the
district court on remand must consider further the issues of the
adequacy of representation, whether the settlement is fair,
reasonable and adequate, and if reached, issues relating to
attorneys' fees.
With respect to the remainder of the opinion, I am of
the thought that some of the discussion is simply not required to
support the holding we reach, specifically Part IV.B and C. In
view of the fact that we are remanding for adequate findings
under Rule 23(a), I think we need not reach the issue of whether
the class requisites have been made on the current record, as we
can anticipate that the district court will conduct further
proceedings and make additional record in order to fully support
such findings. Thus, I think Part V.B.2 dealing with adequacy of
representation, Part VI dealing with whether the settlement is
fair, reasonable and adequate on the record before us, and Part
VII dealing with issues relating to the attorneys' fees simply
need not be addressed in detail as they may come before this
court on a far different record after remand.
I must make clear that I have misgivings about not
joining in the full opinion. The opinion is a most thorough and
scholarly analysis of the numerous issues surrounding settlement
of class actions and approval of settlement classes. It will
stand as the opinion of the court. My concerns are simply that
the court has discussed areas that it need not reach.