Negotiating a settlement on behalf of a defendant in a class action requires counsel to consider a number of factors not typically relevant in conventional litigation. Defense-side considerations such as whether to contemplate an individual settlement, if possible, or a class-wide settlement; coordination with other defendants; the timing and structure of any settlement; and financial and future litigation exposure implications are all significant factors.
In putative class actions, the parties frequently have an opportunity to resolve the claims prior to a decision on class certification, or before an often prolonged and costly discovery process. Early resolution can result in significant savings on litigation costs and the burden imposed on a defendant's business.
Some courts are applying a higher level of scrutiny in evaluating the fairness of a class settlement. Careful planning in the timing and structuring of a settlement can significantly increase the receptivity of a court.
Defense counsel often can work with plaintiff's counsel during negotiations to seek the most advantageous outcome for their client. If court approval is needed for any settlement, collaboration can help ensure the settlement is approved. While leverage degrees vacillate, defense counsel may be able to negotiate a more favorable settlement if plaintiffs know they face considerable issues, such as predominance or manageability, that could present significant obstacles later in the case when plaintiffs seek class certification.
Individual Settlement
In some cases the most cost-effective approach to defending a threatened or filed class action is to settle directly with the named plaintiffs, but the window for settling claims individually often is limited. Once a class is certified, named plaintiffs and their counsel have obligations to the class that will normally preclude an individual settlement. Notably, some jurisdictions make an individual settlement more difficult by requiring court approval, even before class certification, if the case was pled as a class action. Certain venues may require notice to the proposed class of a proposed individual settlement. These considerations must be part of the analysis of whether an individual settlement is feasible and, if so, what terms and conditions should be incorporated into the settlement agreement.
Major benefits of individual settlements are cost, timing and confidentiality. Class settlements are typically costly, consume months for the process to play out, and almost always have to be filed with the court. Individual settlements rarely have to be filed with courts and can be confidential.
The main drawback of an individual settlement is that it does not guarantee the end of litigation. In certain situations, the dismissal accompanying an individual settlement could prompt more lawsuits. While confidentiality provisions are useful, obtaining side representations from plaintiff's counsel also can be of use. While an attorney is typically prohibited by the governing rules of professional conduct from agreeing in a settlement to refrain from representing future clients in a later case against the same defendant, certain provisions can be included in a settlement agreement or side agreement. Plaintiff's counsel can represent that they do not have another client currently retained to act in the stead of the plaintiff, that there is no ongoing investigation to find such a client, and that counsel does not intend to cooperate with any other plaintiff's counsel in seeking to obtain such a client.
Advantages of Early Settlement Discussions
If an individual settlement is not possible or practical, defense counsel should consider carefully the timing of class settlement discussions. The right time to settle will vary by case and depend on factors such as the strengths of the plaintiff's case, other filed or likely to be filed cases, the potential exposure, and the client's business needs.
Depending on the case, a defendant may have a strong argument for dismissal of the case early on at the pleadings stage. For instance, in data breach or other types of putative class actions, the question of threshold standing often is addressed on a motion to dismiss. In such circumstances it may be advantageous for the defendant to attempt to settle before a motion is filed or while a motion is pending. Less case activity can help bolster arguments that the plaintiff's attorney's fees portion of a class settlement must take into consideration the dearth of pre-settlement filings.
Structuring of Settlement Agreements
Class actions widely vary in their subject matter and the outcome sought through the proposed class relief. Similarly, class settlements will vary in their structuring and terms. Terms that should be addressed include:
- How will the settlement be funded, and when and how will the funding be made?
- Will the settlement involve a common fund, and if so, will any unused funds revert to the defendant?
- Will the settlement involve a claims made fund or a hybrid claims and common fund structure?
- What benefits will be provided to class members, and how will those benefits be obtained?
- What notice requirements are implicated by the class settlement?
- Does the class settlement necessitate the involvement of a class settlement administrator, and what role and responsibilities will the administrator have?
- Will the settlement include an "opt-out" class, the more typical class settlements where class members can submit objections or exclude themselves from the class?
- Should the agreement include the option to cancel the settlement if a certain number or percentage submit opt-outs?
- Are injunctive relief elements at issue?
- Will the named plaintiffs receive a service award, if permissible in that court?
- And, of course, how will plaintiff's attorney's fees be addressed?
- Will defendant agree to not object to a certain amount or percentage of the settlement, or reserve all rights?
- If the parties were at an impasse as to the attorney's fees issue, will the issue of those fees be subject to a post-class settlement approval resolution through a process such as arbitration?
Counsel should be cognizant of any sensitivities a particular court has exhibited toward approving class settlements. Certain courts have specific guidelines for approval, which should be taken into consideration when working with plaintiff's counsel to craft a class settlement.
Coordination Between Defendants
When defending a putative class action that involves multiple defendants, it can be in every defendant's interest for counsel to work together in defending against plaintiff's claims. To work with another defendant's counsel and avoid waiving privilege, counsel typically agree on joint defense or common-interest agreements. The common-interest doctrine is best understood as a non-waiver doctrine, meaning it is an exception to the normal rule that communication of privileged information to a third party waives privilege.
Before sharing privileged information with another, defense counsel should carefully evaluate how courts in their jurisdiction view the common-interest doctrine. Sometimes, parties assume the court will honor agreements among defendants and avoid strident imposition of every requirement of the common-interest doctrine in the jurisdiction. In certain situations, this can result in a waiver of privilege. It is worth noting that, while the rules vary by jurisdiction, joint defense agreements are sometimes discoverable.
As useful as coordination with co-defendants may be, disadvantages can arise. Brokering a class settlement may be more difficult when defendants have divergent or incompatible positions that cannot be easily reconciled in structuring a settlement agreement. For example, do certain defendants maintain differing jurisdictional positions, point the finger at other defendants to bear the entire responsibility for any liability and damages, disagree about the proper class definition, class size and scope, and class period for any resolution, or disagree about the entities that will be released as part of a class settlement? Ideally, defendants will be aligned on the major aspects of a class settlement and individualized terms can be drafted as necessary.
Working with Plaintiff's Counsel to Ensure Settlement Approval
Unlike most conventional litigation where the judge simply dismisses a case upon the parties' settlement, the judge plays a central role in the settlement of class claims. First, the court must decide whether the class can be certified for settlement purposes, typically on a "preliminary approval" basis. Second, the court must approve the class settlement, with the final approval typically occurring several months after preliminary approval. In doing so, courts determine whether the settlement negotiations were conducted at "arm's length" and that the settlement is "fair, reasonable and adequate" to all class members.
Rule 23 of the Federal Rules of Civil Procedure and typical state equivalents place the judge in the position of safeguarding the interests of absent class members by scrutinizing class settlements approved by class counsel. Defense counsel can work alongside plaintiff's counsel to make the judge's job easier and improve the likelihood that the court will approve the class settlement. If the settlement benefits are perceived by the court as illusory, if the claims rate is materially low, or if the comparative amounts sought in plaintiff's attorney's fees are high, the court may be reluctant to grant final approval of a class settlement, even if the court granted preliminary approval. Structuring a class settlement in a manner that includes material benefits for all members of the class, particularly when contrasted to the other terms of the class settlement, is almost always in the best interest of plaintiff's counsel, defendant's counsel and their respective clients. While class settlements can be reached without an intermediary, courts may view the involvement of a reputable mediator and the mediation process as indicia of a good-faith class settlement.
While a class settlement often is time-consuming to craft and to see through to final approval, and often involves a material outlay of funds, it may be a better course than the alternative.
Originally published by Bloomberg Law
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